Saturday, December 20, 2008

Plan for the Worst, Hope for the Best

A recent article on MSN Money hit my philosophy on the nose.  In short, don't assume someone is at the wheel, steer your own ship.  Question assumptions, even if they are being made by some very bright people.  

Our current economic crisis is proof that all the brains in the world doesn't necessarily make you sensible.  Even Alan Greenspan expressed 'shock' that things turned out the way they did.  Really Alan?  Because speculation and over-leveraging of assets along with many, many bad loans is likely to turn out well?  

I wonder what planet he's been living on.  But this is true of a lot of my thinking about the economy.  NPR did a segment on a Massachusetts family worried about foreclosure - on a salary of $150k (keep in mind, in this high cost of living area, the average salary for a working couple is about $98k, and that still isn't a lot comparative to the costs of housing and other key items in MA) they had purchased a home for $640k with only $10k down.  And now that there were two children, they were shocked that daycare cost $3k per month.  

Now, just to provide some clarity, without any savings for retirement, $150,000.00 annual income works out to a bit under $8000 a month.  Just their mortgage alone, assuming it's a fixed loan with an approximate interest rate of 6% is about $3837 a month.  Yes, that's right - almost 50% of their take home. 

Add to that the $3000 in daycare payments - and really folks, if you think you are going to be a working parent, make some phone calls and find out the going rates now for your area - and they have used up basically all their income. 

And I haven't even added in food, possible car payments, fuel, heat, phones, dr. appointments and other bills.  Even if these folks are socking away money in pretax savings accounts for daycare and health care, and overtime makes up some of the shortfall, their ship is sinking. Sunk, actually, as they are also carrying tremendous credit card debt.

I'm a planner.  I realize not everyone is.  I wasn't, many years ago.  It was only once I learned lesson after lesson the hard way about money, often worrying about how to pay a bill or where money was going to come from.  I didn't come to my approach to money easily or quickly.  

But I have learned a few things over the years:

 Saving is more important than any acquisition.  It's the thing that allows you to sleep at night, even when bad stuff happens.  I recently learned that there's about a 60% chance that my client won't extend me into February (I am safely employed through January) because of budget cuts.  Was an extra month off before Baby MoneyPenny comes in the plans?  No.  But can we live through it with our savings just fine?  Yep.  It's not how I dreamed of spending our savings, but hey, that's life.  I can absorb the potential unemployment without batting an eyelash.  Not forever of course, but knowing that a job hunt at 9 months pregnant is unlikely to achieve much, I'm prepared and okay with the time.

We also could absorb the recent news that our mortgage bank had incorrectly assessed our escrow over the last year to the tune of $2100.00 - not exactly small potatoes.  We have a choice to either pay the balance immediately, make a partial payment and see our mortgage payments go up somewhat, or absorb it in higher mortgage payments over the next year.  We could do any of them but will probably go for the second option.  I'm cranky about it, but we can absorb it.

Budgeting and planning aren't always fun, but they are always worth it.  Just knowing approximately what we'll spend in a given month, including all the various expenses that pop up throughout the course of the year makes things saner for us.  Sure, it's annoying sometimes to sit and enter receipts into the budget, and sometimes we miss our targets.  But overall, we hit more than we miss, and it's kept our savings targets on track.  

Never assume someone is right just because that's the conventional wisdom.  I remember a conversation that I had with a good, very bright friend of mine.  Essentially the discussion was around the idea  - one that many people I've met believe - that if they go to college and get good grades and work hard, they will achieve financial success.  Quite frankly, that's a pile of bupkus. Going to college increases your odds in a job hunt, and working hard is great, but there's no guarantees about anything.  Ever.   

Over the last years, many new homeowners got told that they could refinance their incredibly expensive ARMs when the rates started to rise.  And then they couldn't....and fell behind...and got foreclosed on - and then it happened more and more, and the investment banks started to fall.  Nobody questioned what they were told, and as a result, they paid the price.  Don't believe everything you hear.  Question everything - even authority.  No one is infallible or can see the future.  

What goes up must come down.  If there's a huge price increase, there's likely to be a decrease - take recent gas price increases and rapid drops.  The fact that everyone closed their eyes to the housing bubble and was so startled when rapid decreases in value started to happen.  Um, yeah.  So next time someone tells you to jump in with both feet before you miss an opportunity, analyze the basic assumption that it is a) one you can't afford to miss and b) one you want in the first place.  

Be an opportunist.  While the points above may make me sound like a pessimist, quite the contrary - I'm a very optimistic person.  I am always looking for an opportunity - to grow, learn, increase my income.  And in chaos, like we currently have in our economy, there's a ton of opportunity.  It just requires creative thinking.  Contractors are reinventing themselves as green builders.  Information technology specialists are teaching themselves to become bridges between business requirements and the technology that gets used.  Look for areas where might provide value - and ask if you can.  One of my favorite quotes has always been by Thomas Edison "Most people miss out on opportunity because it's dressed in overalls and looks like hard work".  Don't miss out.  

You can't see the future, but you can sure as heck do your research.  If you know you want two kids, find out what daycare costs.  Or what you'll be able to manage for a mortgage payment on one salary.  Ask other moms what they spend on things.  And then live like you are in that position already today - to get a feel for how it will work out.  

Plan ahead a little - you'll be happier for it.

1 comment:

Our Common Cents said...

I really love this post. I think it deserves a spot in one of the carnivals. Were I editor, it would be my pick. :)