Human Condition

Jonathan Clements

RISK IS ARGUABLY the most important financial topic. But which risks should we worry about? There are all kinds of contenders: recession, accelerating inflation, political upheaval, global conflicts, sharp market declines, individual company turmoil.

But I would argue that, as we each assess our personal finances, one risk trumps all of these—and that’s the risk that we have lousy career earnings and maybe even find ourselves without a paycheck. How come? It isn’t simply that we would likely struggle to pay the bills and service our debts. Equally important, without a heathy paycheck, it’s tough to be a good saver—and that, more than anything, is the key driver of our long-term financial success.

How can we protect against this risk to our so-called human capital? There are the obvious steps: Build up an emergency fund, so we can survive a spell of unemployment. Get health and disability insurance, in case of illness or an accident. Purchase life insurance if we have a family who depends on us, so our untimely demise won’t leave our loved ones in the financial lurch. But here are four additional steps we might take:

1. Get educated—prudently. Incomes, on average, are closely related to educational attainment. According to a Census Bureau study, master’s degree recipients have expected lifetime earnings of $2.8 million, figured in today’s dollars, versus $2.4 million for those with a bachelor’s and $1.4 million for those who only graduated high school.

But before you rush off to get another degree, think carefully about whether the career you’re pursuing is one you really want. I’ve heard too many stories of 20-somethings who collected advanced degrees, only to find themselves with jobs they didn’t especially like. Sound bad? It’s even worse if collecting that advanced degree involved assuming hefty amounts of education debt.

An added danger: While higher degrees typically mean higher pay, those jobs often also take longer to find. That means you could face a lengthy period of unemployment. The size of your emergency fund should reflect that risk.

2. Make hay while the sun shines. Forget the old advice about socking away 10% or 12% of income every year. That might generate enough for retirement if you hold a steady job for 30-plus years. But what if your job isn’t so steady? As a precaution, save as much as you can when times are good.

And, no, you won’t regret your financial caution. If you hit a rough patch, you’ll be happy for the extra savings. What if all goes well? You can always reward yourself with a lower savings rate later in your career—and perhaps even retire early.

3. Strengthen family ties. Families have long helped each other through tough times. Sure, if you find yourself out of work, you’d rather not ask your parents or your siblings to lend you money. But that sort of thing happens all the time—and I don’t think it’s so terrible, provided it’s treated like a business deal and everybody involved understands the terms under which these loans are being made.

Such intra-family financial cooperation shouldn’t, I believe, be confined solely to moments of money stress. When my daughter bought her home in 2015, I wrote her a private mortgage. It has turned out to be a good deal for both of us: She avoided a bunch of closing costs and I receive a higher interest rate than I could have earned by buying bonds.

Indeed, I think there’s great value in viewing families as a financial unit, where everybody has each other’s back. When we buy insurance, we’re effectively sharing financial risk with a bunch of strangers. Why not share risk with those you love? Historically, one of the most common ways to pool risk is to get married. I’m not suggesting folks walk down the aisle simply for the financial benefits, especially given the hefty cost and disruption of divorce. Still, the financial advantages are hard to ignore: With two incomes coming in, you have a built-in shock absorber, should one of you lose your job.

4. Join the capitalists. There’s been much handwringing about the increase in income inequality since the late 1970s and early 1980s. Those lower down the income spectrum—and those in certain industries—haven’t fared nearly as well as top-income earners.

But even as income inequality has grown, stocks have soared. That’s no great surprise: Lower wages mean healthier corporate profits. What to do? Whether you’re an ardent capitalist or a card-carrying Marxist, the implication is clear: If labor is going to continue to suffer in the decades ahead, one way to hedge your bets is to be a capitalist—by investing heavily in stocks.

Follow Jonathan on Twitter @ClementsMoney and on Facebook.

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