Archives for February 2016

During the Second World War, some tiny Pacific islands were suddenly strategically important, and inundated with Japanese or American service personnel and material. In the years following the war, islanders started dressing up like servicemen and doing parade ground drill with wooden rifles, carving headphones out of wood and sitting in control towers wearing them, lighting signal fires on the runways, and in short doing everything they could to bring the influx of material goods (“cargo”) back. You can read all about these “cargo cults” here.

Because they did not understand the underlying structures behind the sudden appearance of all this wealth, they simply copied the external behaviours that seemed to attract it. They mistook form for substance, and sure enough, the cargo planes did not come back.

Financial security: multiple income streams

A friend of mine recently went from being employed to being effectively a freelancer. We were discussing how having lots of separate income streams was actually much more secure than having just one, when she came up with the analogy for the way people can mistake the trappings of security (a big house, a smart car, a good job) with security itself. It’s a kind of cargo cult. And ironically, many of those trappings make us less secure. A mortgage (literally translated as “death grip”) is the very opposite of security. Your home is secured on the mortgage so the bank will lend you the money to buy it: the security is the bank’s not the borrower’s. And the bank will take your house if you fail to keep up the payments. This has happened to several friends of mine, in the UK and the USA, in the last recession. It is horrible.

Whenever a friend of mine gets laid off, my first reaction is to congratulate them. I have discovered that this can come across as me being an asshole, so I have learned to choke back the impulse to shake them by the hand, and offer condolences instead. But inside, my actual feeling is “you’re free!” Because while a job is no doubt one perfectly good way to spend much of your waking hours, and can pay well, and even at times be worth doing for its own sake, the one thing it absolutely cannot provide is security. No company, government, or any other employer lasts forever. Countries rise and fall, companies come and go, and if you rely on a single income stream, then your financial security has a single point of failure. It doesn’t matter if you have an iron-clad lifetime employment contract: if the company goes bust they stop paying you. There’s a saying in the military: “two is one, and one is none.” It refers to redundancy in any situation; you cannot rely on anything for which there is no backup in place.

The primary solution to this is to have more than one source of income. In my own case, my income derives from teaching in my school's various branches, royalties from my books, and seminars taught outside my school. I think three is a safe minimum. Any one of those streams could fail tomorrow, and we would still be able to pay the mortgage. Just. But none of them can fail instantly, because none of them rest on a single person or entity. My readers can fire me one at a time. But I have several thousand of these wonderful people. My branches and other groups can stop hiring me for seminars; but they are unlikely to do that all at once (more likely that some catastrophe would prevent me from being able to teach).

For most employed people though, running a side-business of any kind is problematic; if it’s within their field, there may be conflicts of interest, and if their job doesn’t give them much time to spare, then there may just not be time. Some friends of mine just do not want to run a business. Fair enough. So the approach then is to siphon off at least 50% of the income into income-generating assets. This theory is beautifully presented by one of my favourite bloggers, Mr Money Moustache. In brief; learn to live off 50% of your income (easy enough if you earn more than about 40k/year, something I have never done!), invest the rest in index funds, reinvest all the income from the funds, and keep doing that until the passive income from the assets reaches the point that it meets your current expenditure. Bingo, you’re secure. Or as Mr Money Moustache would put it, retired.

But…

Well, up to a point. Because the problem with money as a marker for security is that it is highly unreliable. When my family moved to Peru in 1986, my parents bought a new car, a Nissan Sunny, for 150,000 Inti. Three years later, a beer in a nightclub cost half a million. That’s an extreme example of inflation, but we all remember the recent bank crashes, pension fund fraud, and a host of other things that can strip you of all your savings in a heartbeat. War, for instance. The Soviets invaded Finland in living memory. The property I own here would become immediately worthless if that happened again, because I would grab my kids and run, leaving everything behind. Afghanistan in the 1970s was generally a safe nice place to be. Khaled Hosseini’s The Kite Runner has a lovely description of it. Some Europeans and Americans even retired there. Oops. Likewise Lebanon. Before the civil war, Beirut rivalled Monaco as a place for Europeans to footle off for a nice safe vacation. Less so since it tore itself apart. I don’t think it’s likely that Russia will invade Finland, nor that Europe will plunge into yet another maelstrom. But I’d be a fool to rest my sense of security on it.

What is safety?

So what is safety? Mostly, an illusion. You can lose everything, including your life, during your next heartbeat. Life is dangerous: everybody who tries it dies eventually. So step one in non-cargo-cult security is to make friends with risk. Everything is risky; if something feels completely safe, you’re wrong. Then learn to evaluate the real risk, as opposed to the perceived risk. Which is more dangerous: driving a car or eating candy?

Driving your car is very, very dangerous. About 36,000 Americans were killed in car crashes in 2012 (source). Eating too much sugar is much more dangerous. In 2010, according to the American Diabetes Association, 69,000 died from diabetes, with a further 234,000 whose death certificates credit diabetes as a contributing factor (source). In 2010, there were 25.8 million diabetic Americans. Only 1.25 million of those had type 1 (which is not caused by lifestyle). Type 2 diabetes is caused almost entirely by abuse of sugar. There are other factors, but in short, you can’t get Type 2 diabetes from a diet with no fast carbs. Here is a documentary that is worth a look.

I digress somewhat; my point is that human beings are very bad at assessing risk, and treat as safe things that are dangerous (eg sugar) and treat as dangerous things that are safe (letting your kids walk home from school). One very good book on this topic is Against the Gods, the Remarkable Story of Risk, by Peter L. Bernstein. Read it!

So what's the answer?

So the question then is what is real security? I refer you back to this post. Love is vastly more reliable than money. I know for a sure and certain fact that no matter what happens to me or my wife, my kids will neither starve nor be homeless, because somebody among my family or friends would take them in. That may seem obvious to you, but at root, this is what security means: the freedom from watching your children starve. Those friends of mine who lost their homes? They had a couple of shitty hard years, absolutely. But their children didn’t spend a single night in the open or a single day hungry. Because they had friends, sources of income other than the jobs they lost, family to take them in until they got their feet under them again, and so on.

So here are my recommendations for actual security:

1. Spend time connecting with the people you care about. If the shit hits the fan, they’ll be there for you.
2. Diversify your income. Have more than one stream.
3. Build up income-generating assets. An assets is something that generate income; your home is not an asset, unless you rent it out.
4. And most importantly: understand and be ok with the fact that it could all collapse in an instant, life is inherently unsafe. If you feel completely safe, you’re wrong.
5. Get some perspective. What, really, are the chances of you starving to death?

I anticipate that this post will ruffle some feathers, because people don't like to be told that their sense of security is based on illusion, or that they are not managing their money very intelligently (I have friends who have earned 150k or more per year for the last 10 years and still owe money to the bank. That is baffling to me). I'm sorry if I've hurt your feelings. But comforting illusions cause more trouble than they are worth, and it's always better to see what's really there.