While driving to my client’s office for work, I was listening to news on the radio about the possibility of a worsening economy, as indicated by increasing unemployment numbers and further declines in home sales. This made me think about uncertainty and how I deal with it now. I realized, since becoming a Free Agent I have really changed the way I manage cash reserves and large expenses. I don’t assume I have a perpetual income. As an employee, I did unfortunately slip into that way of thinking; that there would likely be an uninterrupted stream of direct deposits. Now, I tend to hold more cash.
My planning horizon is about 6 to 12 months, to anticipate the annual life insurance premium, annual purchase of airline tickets for vacation, any expensive car maintenance such as a set of tires. I delay discretionary purchases if I don’t feel there’s enough cash in the bank.
I do a bit more contingency planning too:
Do I have enough cash to cover any major surprises, such as unexpected travel to visit a family member in need, a car accident, sudden need of dental work or medical procedure? Yes, we have insurance, but those policies have relatively high deductibles.
Do I have enough cash to get-by if my current project suddenly stops?
What is my plan for finding the next client project and how many weeks of down time will there be between projects?
Some people may consider this way of life too uncertain. But I’ve come to believe this is the natural way of the economy and therefore we owe it to ourselves to deal with it as it really is. No one else is going to save us. We may all be in the same camp, but we have to bring our own tent.
I think during the post World War II economic expansion we incorrectly came to believe we could become permanent employees, get a steady pay check through our entire lives and not worry about it much. Some of us saw our parents do that. But for most of human history, that has not been the case and it is not the case now. We all need a greater capacity to handle uncertainty. For me, the answer is not to coerce someone into guranteeing me a permanent job. The answer is to be better prepared for surprises and always be on the lookout for the next project, the next contract assignment.
I think some of that old thinking, as employees we sometimes assume we have perpetual income, has led to a low savings rate in America. Now that we are essentially on the street as individual trades men and women, I hope we will save more. That will push up the personal savings rate in America. With traditional employment relationships on the decline it is imperitive that we take responsibility for our own finances, reduce our expenses to whatever level of austerity is necessary (let friends and neighbors laugh at me driving that weird car – no payments) and stash-away reserves to deal with unexpected events. A nice residual effect will be, we will demand less of others to take care of us. That’s how we become self-sufficient individuals and that’s how we develop national pride too.