The fact of the matter is that at the end of the day not even the economists fully foresee or even understand (let alone agree on what they do understand) the full implications and progression of the state of the current world financial system.
Another fact is obvious: the global financial system is so interconnected and highly leveraged now (compared with even 10 years ago) that it is, perhaps, the ultimate complex dynamical system. The platitude about a butterfly flapping its wings in Korea obscures the details, but touches an essential fact about the current state of global financial interrelatedness.
We can learn as much as we like about this complex system, but by its very nature emergent properties can manifest themselves that we will not have been able to fully predict (or control against) in advance.
What does this mean? It means everyone has a right to be a little bit worried. This doesn’t mean you’re paranoid – it means you’re paying attention to details and their relationships.
With that in mind, have you thought about the basic financial necessities that would get you through the financially unthinkable? I’m not talking about any old emergency plan, although you could think of this as the ultimate emergency plan. What I have in mind is more along the lines of an ultimate financial survival plan.
Your Ultimate Financial Survival Plan
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Take your idea of your emergency fund and blow it up ten times its size. I’ll bet your emergency fund consists in a savings account, maybe two, held at a single bank (maybe two). Have you thought about how to access it if broadband cuts out or your local ISP is down, or there is a virtual packet traffic jam somewhere?
What happens if the financial problem doesn’t rest with your spending habits or personal employment, but happens on a much larger scale, affecting hundreds of thousands of people? Apparently, the Paulson/TARP bailouts averted the world from the brink of financial disaster back in early October 2008. But existing banking relationships have only further consolidated since then, inflating the banks that were already formerly too big to fail and bestowing even more asset centralization and leveraging capabilities upon them.
You need something more than an emergency fund (or even several emergency funds). And you need to adjust the usual idea of having a general emergency plan – I’m not talking about natural disaster scenarios here.
What you need is a specifically financial survival plan – some system that will allow you to stay afloat financially, and/or to stay protected financially, no matter what might happen to the global financial infrastructure. With recent calls for a return to the gold standard, or a system of special drawing rights for the reserve currency system, and with an attenuation of G20 confidence in Bernanke’s second quantitative easing experiment, the global financial furniture is in the process of being moved around. Don’t forget, banks are still failing by the week in the U.S.
Creating a Financial Survival Plan
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There are two general ways in which you can go about imagining and constructing your financial lifeboat. One is to construct it from scratch – imagining what you need and just finding a way to achieve it. Another is to start with what you have and are familiar with. Since I’m guessing this is where more people are at, let’s start there.
There are really only three main categories you have to work with: income, spending, and investment.
You know you need to boost one, cut back on the other, and get smart about the third. But survival finance requires you to think a bit more creatively than the usual platitudes (which are, of course, still true).
Readers who haven’t really thought about their emergency plans in this way before should take a good look at this emergency planning book I reviewed and highly recommend, which covers everything, but includes some key financial planning tips as well.
How Your Investment Strategy Should Change With the Rise of the Yuan
Survival Finance Essentials
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You need to think about the survival of your finances on these three key dimensions, each of which is interconnected with and supports the other two.
- Income Replacement
- Income Diversification
- Income Security
Income Replacement
If your job is outsourced, or your company goes bankrupt, or global regulations threaten your source of income, do you have a couple of alternatives already in place? Ideally, you want your income source to be able to stand up without you. There are many forms that passive income can take, but you need to come up with a system that will work whether or not you do (and whether or not the global banking system is strong or fragile).
Your plan here may or may not include starting a side business, creating a bartering network, investing in income-producing assets, or buying an existing business and taking it over. You might also come up with a radical spending reduction plan for temporary measures.
Income Diversification
Which brings us to diversification. It’s not just for investments, but for your main source of income, too. If you only have one job, all your income eggs are in one basket. Supporting a family on that? May not be the wisest decision. You need to have a side hustle and plan B happening at the same time.
So diversify your investments, but also your income. You might want to read my thoughts on how to convert your income into progressively safer streams.
Diversify DRIP Income by Withdrawing Shares
Income Security
Building on that last point, your income systems need to be secure. The more electronic we become, although many like to congratulate it as some sign of progress, the more vulnerable we become too. Identity thefts, hacking, phishing, online blackouts and system failures are all risks new to the early 21st century mode of world finance.
It’s a good idea to keep more than one bank account and access card. It’s also a good idea to keep on top of your online passwords, changing them regularly (at least once a year), and being smart about keeping your financial documents organized at home. Don’t leave your purse open beside the front door. Don’t leave your book of passwords lying open on your office desk. If you bank online and especially if you bank through your iPhone or Blackberry, make sure you’re in a secure location and have a security system in place in case your phone is stolen or lost.
In sum, you need to construct a system that will give you automatic, diversified, and secure sources of income. It’s obvious, but many of us just don’t take the time to make a global financial contingency plan that looks at all these aspects of the situation. If you think you’ll be ok just because you have life insurance, home insurance, car insurance, etc., you’ve missed the point.
Global Financial Emergencies
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Let’s not debate whether a global financial meltdown could happen, because we know it could. The trick, rather, is just to stay ahead of the game by having a plan in place and staying on top of the news (rather than congratulating yourself for having ignored the news altogether for more than a month, etc.). You don’t have to follow every business story – you just have to pay attention to the key developments and changes: central bank actions around the world; debt levels in each state and in sovereign balance sheets; new global banking regulations, etc. I would tune in at least once a week to stay on top of any major developments.
Do you think it’s overly conscientious to have such wide-ranging, long-term contingency plans in place, or do you already have some of your own? Please share your ideas in the comments below.
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{ 4 comments }
Great article, as always…but this one seems to really hit home. 99% of us go about our days not realizing what financial chaos is going on around us. Crazy and scary at the same time.
Thanks. I think it’s a great exercise to imagine a financial system we can set up for ourselves so that we will always have our basic needs taken care of. An emergency fund can only go so far. We need to extend the concept, which is just a band-aid, into a whole preventative, long-term planning effort.
I certainly agree that we could see a global financial meltdown.
I am not so sure that there is anything that I could do to protect myself. If the system goes down, I tend to think that I go down with it.
I see it as my best bet to do all that I can to stop the system from going down. That’s where I put my energies (I acknowledge that it is possible that I will live to regret this).
Rob
@Rob – we’re certainly very intertwined electronically – if there were a virtual flash crash that brought down interbank lending and money market funds again, coupled with sovereign debt worries, we could see more runs on banks and the disappearance of liquidity, as hard as that is to imagine now with so much more post-QE liquidity in the system. But I think that if we maintain cash reserves and multiple bank accounts, we’ll be better off. Paypal is an interesting intermediary that could be taken advantage of if necessary, too.
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