Category Archives: Personal finances

Personal finances: Reality check

The aim of this final post in the personal finances series is to ensure realistic expectations regarding the benefits of taking full responsibility for personal finances. Two primary reality checks are discussed: 1) the large amount of time it takes to build financial resilience and 2) the great uncertainty in today’s global economy. Let’s take a closer look:

It takes time…

Building financial security, financial freedom or even financial power takes many years of financial discipline. In essence, all that is needed is that you adhere to the simple ten word secret – spend less than you earn and save/invest the difference – for an extended period of time. If you do that for long enough, your personal finances will be in a very healthy position. The graph below shows the outcome of two saving philosophies discussed in a previous post.

Getting to the point of true financial freedom will therefore require that you accept this fundamental truth and commit to patiently building up your financial resilience. If you want faster gains in financial resilience, you can invest some time and effort into streamlining your life so that you reduce your costs of living. Intelligent lifestyle changes that will grant you more life for less money really lies at the center of financial resilience and is the best place to start.

We live in crazy times

Our modern economy is a place where people can conjure trillions of dollars out of thin air by pressing a few buttons on a computer, where a few words from an important central banker can move markets and cause trillions in instant wealth transfers, where governments do their level best to make all their citizens go broke, where rich people borrow trillions of dollars from poor people and refuse to take the cuts necessary to restore balance, where it is more profitable to trade in fictitious paper wealth instruments than to produce real goods and services, and where our entire global economy is based on the fundamental impossibility of perpetual exponential growth. This really is sheer madness and building financial resilience within this crazy system is unfortunately much harder than it actually should be.

What this ultimately means is that you will have to be very careful to preserve the purchasing power of your accumulated savings and to ensure that you remain fully employable. These topics featured regularly in this section of the One in a Billion project and will require quite a bit of self-study in order to enable informed and independent financial decisions. Our economic systems really have become so complex, unpredictable and downright insane that you really need to be well informed to safegaurd your wealth. This is your responsibility. Take it.

Personal finances: Overcoming the resistances to financial security

This blog often links most of the grave problems facing our civilization today back to our modern culture of consumerism – that debilitating collective mindset which gets us to destroy our environment, our economy, our society, our health and our personal finances in the hopeless pursuit of happiness-through-consumption. This omniscient force is the primary resistance to financial security and will be dissected a little further in this post.

Consumerism evolved naturally within our modern fossil-fuel-driven debt-based system of perpetual exponential economic expansion. If people continuously want to consume more, there will be a great incentive for people to produce more, thereby steadily increasing overall material affluence. This system worked well for a few decades while we could consume easily accessible planetary resources and heap on more and more debt, but it is becoming increasingly clear that the party is finally over. And yes, after decades of thoughtless indulgence, the developed world is now slowly waking up to reality with a massive debt-hangover. 

So, while consumerism at least made a little bit of sense in decades past, it now makes absolutely zero sense. It is therefore quite obvious that we have to deal with this evil. And yes, no weapon is as effective against consumerism as a solid commitment to building financial security. Let’s take take a the three primary foes this weapon is meant for:

Consumer advertising

The average developed world citizen is exposed to as much as 5000 advertising messages per day, all promising the same thing: consuming this product will make you happy. Well, if this were true, we would be living in heaven right now. But no, unless heaven is filled with fat, sick, broke, stressed and depressed people, we are nowhere near the Pearly Gates. So, next time you see one of those colorful advertisements promising you Utopian happiness with the purchase of some totally unnecessary consumer product, see it for the joke it really is. Advertising actually becomes quite amusing from this viewpoint. Give it a try.

Easy credit

Our entire financial system functions on ever-expanding quantities of debt. This fundamentally unsustainable system has reduced the science of economics to nothing more than a set of mechanisms through which people can be convinced to borrow and spend more and more money. Right at the top of this list is the lowering of interest rates and the loosening of credit right up to the sheer insanity that was the buildup of the 2008 housing bubble. Please don’t add to this already humongous problem. Borrow responsibly.

Convenience

The economies of developed nations have gradually devolved into one big service sector specializing in bringing goods manufactured in developing nations (under conditions that can often qualify as modern day slavery) to debt-laden “rich” people. Indeed, consumption has never been easier than in our modern age with all of its credit cards and shopping malls. Overcoming this threat is quite simple really: cut up your credit cards and stay away from malls. No rocket science.

Personal finances: Personal benefits

This second installment of the final three personal finance posts will discuss the personal benefits that will come to anyone taking full responsibility for his/her personal finances. As discussed in the post introducing the One in a Billion action plan, three different categories will be discussed:

  • Health – increase in functionality of body/mind and longevity
  • Wealth – increase in earning power and financial resilience
  • Happiness – joy of day-to-day living and overall life satisfaction

Health

As discussed previously, “Affluenza” is a very serious threat to public health within our affluent modern society. Overweight statistics are going through the roof, stress levels are as high as they have ever been and levels of physical activity are at historic lows. The obvious result is a true epidemic of self-inflicted degenerative disease and all the resulting societal and economic ramifications.

Saving consistently and borrowing responsibly is an excellent way in which to safegaurd yourself from Affluenza. Things like trading your car for a bike, switching to a more plant-based diet and getting your entertainment from sports or walks in nature instead of TV or computer games will do wonders for your health and finances. Even if you do these things purely for the purpose of saving money, they will add many years to your life and much life to your years.

Wealth

A retirement age American who saved only 15% of the median American income over the past 40 years would be a millionaire by now. That is how easy it is. Building wealth is a patience game of applying the simple ten word secret: spend less than you earn and save/invest the difference. No rocket science.

Unfortunately, decades of gross fiscal irresponsibility across the board has made investing quite a lot harder than it used to be, but, as discussed throughout this series, it is still possible to gain some meaningful returns or at least preserve your purchasing power through this time of great economic uncertainty. And yes, when the dust finally settles, those with some wealth safely stowed away will be able to profit greatly from making the productive and ethical investments necessary to build a sustainable future. Investment opportunities that can double your wealth every 5-7 years will become reality again. Just be patient…

Happiness

Excessive consumption does not bring happiness. That much has been established beyond any shadow of a doubt. A commitment to saving 10-20% of monthly income will therefore have no negative impacts on happiness. In fact, reduced consumption will soon start promoting happiness once you achieve financial security and eventually financial freedom. In addition, the reduced clutter brought by decreased spending will also simplify your life, freeing up more time for those things scientifically linked to happiness: vibrant health, nourishing personal relationships and free creative expression. Stop looking for happiness in places where it obviously cannot be found.

 

Personal finances: Potential for global crisis mitigation

The primary aim of the One in a Billion project is to contribute to the mitigation of the multifaceted sustainability crisis bearing down on us (summarized here). As discussed in the first action plan post, each of the ten major categories covered in the One in a Billion project will be closed by three posts discussing the potential for crisis mitigation, the benefits to individuals implementing the strategy and the primary resistances to change that individuals are likely to experience. Five categories for potential crisis mitigation will be briefly covered in this first post:

  • Climate change – carbon footprint reduction
  • Resource depletion – ecological footprint reduction
  • Economic crisis – sovereign debt reduction
  • Social inequality – increase in social mobility
  • Societal complexity – reduction in interdependence and increase in adaptability

The estimates given below represent the potential impact if the average American began saving 10-20% of their monthly income and began investing and borrowing more responsibly. As shown in the graph below, however, Americans will have to do a complete cultural U-turn in order to achieve this. (American statistics are used simply due to the large pool of available data.)

Climate change

Do you know what the primary cause of climate change is? Burning fossil fuels, right? Well, actually not… The primary cause of climate change is consumerism – rich people leaving carbon footprints of 20, 30 or 50 tons of CO2 equivalent per year (the sustainable limit is 2 tons/year). Burning fossil fuels in itself is not a problem – after all, CO2 is a crucial ingredient in the great carbon cycle which makes all life on earth possible – the problem is just burning fossil fuels at the enormous rate we do. Currently, the earth manages to absorb about a third of our CO2 emissions, implying that we are overshooting the mark by close to 70% – just about the CO2 share of the richest billion people. If the richest billion therefore cuts consumption by saving and investing 10% of their income, they could cut CO2 emissions by 7%. Naturally, if these savings are invested responsibly (e.g. in the green economy), the potential for climate change mitigation grows even larger.

Resource depletion

The potential for ecological footprint reduction through reduced consumption is also about 7%, but such reductions can have much broader implications as well… Let’s take oil for example. Up to 2004, we got by primarily on cheap conventional oil – stuff that was easy and resource efficient to extract. But as consumerism swept the world in the buildup of the 2008 financial crisis, we hit “peak conventional oil” and prices started spiking like never before (500% jump in five years). Now that oil prices are five times that of the norm, it is economically feasible to extract oil from shale fields and tar sands – methods that use orders of magnitude more resources in the extraction process than that used by conventional oil. This results in vicious cycles of price inflation and environmental degradation which are especially ridiculous if you realize how tiny the percentage of unconventional oil production (the only reason for the entire price spike) really is. A simple 10% reduction in consumption from the richest billion people can easily wean us from unconventional oil, bringing tons of environmental and economic benefits.

Economic crisis

As discussed in more detail elsewhere, the economic crisis we face today is simply a symptom of the fundamental forces working to re-balance the incredibly lopsided global economy of today. This rebalancing will certainly be painful for many people, but we can make it a whole lot worse by our continued attempts to perpetuate this great imbalance through more borrowing, spending and money-printing. Yes, sharply increasing savings rates will slow down the economy and lead to temporary job losses in our total consumer societies, but we can either take a little pain now or massive pain later on. Really, greater savings rates among the richest billion is vital to avert a truly catastrophic economic disaster.

Social inequality

This point is tied very closely to the previous one. The temporary economic slowdown brought by the significant decrease in private consumption required for saving 10-20% every month will result in a period of job losses which tend to hit the poor the hardest. But again, this pain is nothing in comparison to the turmoil that could result from something like a full blown American sovereign debt crisis. In addition, reduced consumption will bring prices down (such as the oil example given above) which will greatly benefit the poor. And finally, the poor remain poor simply because they never start saving and investing. A new culture of saving and investing across the income spectrum will therefore do wonders for social mobility.

Societal complexity

Our enormous appetite for consumption has made our world incredibly complex. Massive multinational corporations now rule the world simply because consumers value low cost products far above environmental, ethical and community considerations. Due to the power given to these corporations by consumers, they are continuously growing in influence and complexity. Through the resulting global web of complexity, the gas you put in your car might tie you to massive bloodshed in the Middle East, the shoes on your feet might tie you to child labor in China, the medicine you pick up at the pharmacy might tie you to the gradual destruction of public health and any consumable you buy comes with an enormous CO2 pricetag. Cutting down on consumption can alleviate all of these grave problems.

Summary

The potential impact of greater responsibility regarding personal finances can therefore be summarized as follows:

  • Climate change – >7% carbon footprint reduction (and much more from ethical investments)
  • Resource depletion – >7% ecological footprint reduction (and much more from avoiding expensive unconventional resources)
  • Economic crisis – Prevention of a full-blown Western sovereign debt crisis
  • Social inequality – Protect the poor from the disaster of an economic meltdown and greatly increase social mobility
  • Societal complexity – Reduce the power and influence of big multinational corporations

Curing the madness of our economic system: Restoring accountability

Finally, we get to the final installment of this little series. The first three posts described the sheer madness that is our fiat currency system, the twisted international economic relationships it has created and the gigantic quantities of unproductive debt that has been accumulated in the process of constructing these great imbalances. The previous post then proceeded to describe the potential of using competing gold/silver backed currencies to gradually phase out the madness of fiat money and the gross imbalances it creates. This post will wrap things up with a look at what needs to be done to cure society’s severe debt addiction.

In short, all that needs to be done to achieve this noble aim is to restore accountability within our society. Yes, I know – easy to say, hard to do – but it must be acknowledged that a very large portion of the economic woes we are facing today (and the European sovereign debt crisis featured in the above video is unfortunately just the beginning) is due to the gradual erosion of accountability when it comes to financial matters. This applies right the way through from individuals to banks to government. Let’s take a closer look:

Individuals

The debilitating culture of consumerism and entitlement that has taken over the developed world has led people to come up with a rather impressive collection of scapegoats for their current financial troubles – anything from the government to the “banksters” to the “1%” to capitalism. As a result, people feel entitled to ever increasing quantities of government spending and welfare (even thought the government is even more broke than they are).

Yes, many external factors have played a role in the current economic slowdown and the rapidly rising unemployment figures, but the real root cause of the majority of personal financial tragedies is the self-inflicted combo of massive debt and next-to-zero savings (i.e. a complete lack of financial resilience). Before people assume accountability for their own personal finances, we will continue sliding down this very slippery slope of mounting debt and out-of-control spending. This is essentially the topic of the entire post series on personal finances and I really think that  restoring personal responsibility in this crucial area is a central part of curing the madness of our economic system.

Financial sector

Although the individual accountability for personal finances remains the most important aspect, the increased levels of accountability needed to allow financial institutions to correctly price risk is also a vital factor. As discussed previously, the socialization of mortgage debt through exotic financial instruments played a very big part in the 2008 subprime mortgage crisis and many other such instruments are still in use today (just take a look at this infographic on the size of US banks’ derivatives exposure).

It also does not help when too-big-to-fail banks are continuously being bailed out upon the obvious collapse following years of totally reckless speculation. Irresponsible institutions should be held accountable when the hammer drops so as to re-balance the pricing of risk. The modern financial sector is well known for setting up the game so that they win big if a risk pays off and the taxpayer takes the losses when it doesn’t. These kinds of heads-I-win-tails-you-lose situations must be prohibited by law if we are to cure the madness of our economic system.

Government

Finally, we get to catch up with our current economic crisis at the level of government. Following decades of financial recklessness on the part of individual consumers and financial institutions, the majority of Western governments now face rapidly mounting levels of sovereign debt and widening budget deficits due to dwindling tax revenues and ever increasing demands for state welfare. This is the final level and, due to the socialization of debt discussed previously, it is also the most dangerous because it erodes almost all accountability.

Typical over-optimistic economic projections. The US budget deficit for 2011 was $1.3 trillion and looks to be around $1.11 trillion in 2012 (roughly double the prediction).

Restoring accountability for sovereign debt is therefore essential to curing the madness of our economic system. Instating a tax directly proportional to the interest payments on national debt might be a good way to achieve this. The electorate will certainly be more cautious about voting for ever-increasing quantities of government spending when they see the effects of reckless government borrowing on their tax returns…

The dangers of socializing debt

When government or some other institution borrows money from the market, they issue something called a bond – a promise of eventual repayment with interest. The basic idea behind bonds is sound: the government or business will take the money and use it wisely in order to better the lives of society as a whole so that they will always be able to pay the loan back later on (the definition of an investment loan). Unfortunately, however, this noble aim has been all but forgotten due to the lack of accountability brought by the socialization of debt.

By socializing debt, I mean that the power and responsibility associated with these enormous amounts of borrowed money is spread over a very large number of people – often thousands or even millions – so that no-one can be held accountable. To illustrate the problems arising from this situation, this post will briefly discuss the three primary types of bonds issued in the United States: Government bonds, mortgage backed securities and corporate bonds.

Government bonds

Long term government debt is a very popular investment vehicle because it is thought to be very secure. After all, an entire nation is responsible for paying it back. However, the European sovereign debt crisis and the soon-to-be American sovereign debt crises offer clear proof of the dangers of socializing debt in the form of government bonds.

Sovereign debt is getting completely out of control in developed nations simply because politicians can only get elected by promising more spending, more benefits and fewer taxes. And since this debt is very thoroughly socialized, no-one really cares about the fact that the debt keeps piling up without doing anything to improve the underlying productivity of the economy (typical of a consumer loan). Like any totally unsustainable system, this can be fun for a while, but eventually you end up with the PIIGS…

Mortgage backed securities

This second type of socialized debt has played a central role in the 2008 sub-prime mortgage debacle that still haunts us today, five years later. In this case, bankers developed some exotic new financial instruments to socialize mortgage debt and, because all direct accountability went out the window, people were suddenly willing to take completely ridiculous risks. Loans were given to anyone capable of signing his name on a piece of paper and the rest is history…

Corporate loans

Corporations are somewhat different. Due to their business nature, corporations are generally good at generating profits and paying back loans (simply because profit really is their only goal). But because the responsibility is socialized, accountability regarding the manner in which the amazing power brought by the trillions and trillions of borrowed dollars is wielded very quickly gets lost. The provocative documentary “the Corporation” describes a corporation as a classic psychopath that will go after its primary goal (making a profit) with no regard whatsoever for things like basic human rights and the environment. Take two hours out of your life to watch this documentary on Youtube. It’s certainly worth it…

Borrowing: Business loans

Finally we get to a type of loan that simply has to be an investment loan. Indeed, if the money you borrow in order to start a business does not significantly improve your ability to add future value (as any investment loan should), your business will fail and you will lose a lot of time and money. This makes business loans a lot more beneficial to our civilization in general simply because people have a direct incentive to ensure that the money they borrow ultimately benefits society.

The problem is just that the trillions and trillions of dollars worth of consumer and speculation loans given out over the past couple of decades have now created a totally over-leveraged economy where business start-ups are even riskier than usual. You therefore have go to extra lengths to ensure that you can offer a product or service that will remain in demand even if the economy turns downward. This certainly is no trivial task.

If you want to be a true hero though, you can consider starting a business especially focused on promoting the sustainability of our civilization. Making good money from something that truly contributes to the world, something that will help create a pleasant living environment not only for this generation but also for those yet to come, really comes very close to the ultimate achievement in life.

The range of goods and services which can meet this noble aim really is very wide, but can be broadly grouped into those contributing to the three types of sustainability often mentioned on this blog: environmental sustainability, economic sustainability and societal sustainability. One of the primary reasons why our society is on such a dangerously unsustainable path at the moment is because the goods and services offered by business very often subtract from environmental, economic and societal sustainability. This has to change.

Businesses contributing to environmental sustainability include all goods and services that will allow consumers to conveniently gain their energy, food and wide range of other consumables in a more sustainable manner. This involves things like home renewable energy installation, organic foods and environmentally friendly transport mechanisms like e-bikes or electric cars.

Services promoting economic sustainability include any advisory service that might get people to save and invest consistently and borrow responsibly. Strategies for so-called downshifting can also contribute greatly to economic sustainability.

Finally, societal sustainability can be promoted through business by any advisory service that will free people from our current culture of consumerism and entitlement and promote a new culture of contribution and personal responsibility. Possibilities in this category include anything from life-skill training for the poor to personal health counseling for the rich.

Another interesting business idea I like to call a sustainable living information center (SLIC) is described here. Regardless of what you do, however, if you can leverage your business loan to make money in a manner which contributes to the sustainability of our society, you will be a real modern day hero.