For any of those lucky enough to spend time with a grandparent, it’s likely that at some point the virtues of saving were brought up; especially in the context of the 1930s. Whether your grandparent shared their own memories or passed along stories from their family, few decades have created a stronger impression in the minds and hearts of Canadians. During the 1930s, a period now referred to as the Great Depression, unemployment reached 30%, global demand for Canada’s natural resources – the lifeblood of the Canadian economy – all but evaporated, and a series of droughts struck the Prairies causing farm yields to crater. The population made sacrifices, forgoing all but the most necessary goods and services, and the country became focused on making each dollar last. The feelings of not knowing where the next meal will come or where the family will seek shelter created a generation of fiscally prudent savers ever-prepared for the next economic downturn.
Fast forward 70 years and the importance of saving has faded. While there isn’t one root cause, it doesn’t help that Canada has prospered greatly for most of the labour force’s working memory or that money can be borrowed seemingly fee of consequence as Central Banks around the world maintain a Zero Interest Rate Policy. However, we should stop and heed the words of Spanish Philosopher George Santayana: “those who cannot remember the past are condemned to repeat it.” Even before discussing why a portion of income should be saved for investing (hint: to take advantage of the magic of compounding), each and every person reading this should have an Emergency Savings Fund.
Life is unpredictable and for many follows Murphy’s Law. In light of this, being prepared, as our grandparents were, is something we should all strive for. Unfortunately, recent research from the Canadian Payroll Association found that 48 per cent of respondents believe it would be difficult to make ends meet if their paycheque was delayed by a week. Four in 10 Canadians said they spend all or more of their take-home pay, while nine in 10 carry some form of debt. This needs to change; we as a population need to be better prepared. But what does being better prepared look like? As with most advice, its depends:
What Are Your Fixed Costs?
Your monthly expenses can be thought of in two ways; fixed or variable costs. Fixed costs are items like a mortgage, car payment or basic food needs. These costs provide for the necessities of life and must be incurred each month. Variable costs are items like clothing, concert tickets or meals at fancy restaurants. These costs, often luxuries, lead to fun experiences or great possessions but are not necessities. Try this: think about your expenses last monthly and total up items you consider to be fixed costs. This amount will give you sense of how much you are spending on necessities. If your fixed costs are a large percentage of your total costs, you have less financial flexibility. This means if your income changes in the future, it might be difficult to fund your current lifestyle. To compensate, your Emergency savings fund should be large enough to cover your fixed costs many times over. On the other hand, if more costs are variable you have relatively more financial flexibility and would have an easier time scaling back expenses if income levels decrease. Looking at the two groups together, Emergency savings for the more financially flexible doesn’t need to be as quite large as for those inflexible folks with high fixed costs.
The higher your fixed costs, as a proportion of total costs, the lower your financial flexibility and the larger your Emergency savings should be.
Where Do You Work?
If you are employed by a company, your employment agreement falls under labour laws that stipulate if you are terminated you are entitled to severance pay. Rules vary by Province but severance is typically calculated as a function of your time with the company. In Ontario the stated minimum is one week per year of service, although many employers will provide two weeks per year of service as a gesture of goodwill. Therefore, the longer you’ve been with the same employer, the higher your severance will be. For those who work on a contract basis or are self employed, there are less protections under the labour laws. Without explicit mention in the contract or service agreement, severance will not be paid. Therefore the latter group should be diverting earnings into Emergency savings with much greater urgency than those who have been with the same employer for multiple years. This urgency should not trump reducing debt with double digit interest charges but it should have priority over variable costs. At that same time, that’s not to say if you’ve been working at the same company for some time that severance will be sufficient to cover your costs, rather you could think about allocating an equal amount to paying down debt and building up Emergency savings.
The less tenure and stability you have in your employment, the greater urgency you should have to accumulate Emergency savings.
How Antifragile You Are?
In Nassim Talib’s book Antifragile he tells the story of two brothers. One is a Taxi Driver and the other is a Banker. Initially – and largely in line with the thinking of society – the Banker is portrayed as someone who has a stable job and financial security while the Taxi Driver is portrayed in the opposite light. However as the book proceeds Talib argues because the Banker lives lavishly off of a high salary while working only for one employer (the Bank) he is actually quite fragile. The Taxi Driver on the other hand leads a more frugal life and has the ability to set his own hours, working more if he requires more income or less if his savings are sufficient. Further because each new passenger is essentially a new employer, the Taxi Driver has many potential sources of income. These characteristics together make the Taxi Driver antifraglie. Consider if you are more like the Banker or the Taxi Driver. Should you fall into the former category it would be prudent to accumulate relatively more Emergency savings as your earning power will decline in a step function without employment. Those with earning power similar to the Taxi Driver should continue to accumulate Emergency savings but not at the rate of the ‘Banker-types’.
The more fragile (less antifragile) you are, the more Emergency savings you should accumulate.
While you may fall into the different categories above, the main message is to accumulate Emergency savings so you will be prepared in the event these funds are needed. Save early and save often to get on track for a financially flexible, stable and antifragile relationship with your money.