Throughout our lives, we all encounter difficulty and hardship. That hardship can be made easier or more difficult based on how thoroughly we prepare for it. By proactively saving money, we can minimise future financial catastrophe.
Loss of income, unexpected expenses, and increased burdens can all negatively impact our finances. Without proper planning in place, these changes in circumstances can lead to ruin.
This article is part of my Saving Series, where I discuss how increasing the amount of money you save allows you to ignore or defeat aspects of society that would otherwise defeat you.
Minimizing future financial catastrophe is a non-negotiable fact of life. Without preparing for the future, it becomes impossible to get ahead and improve your circumstances.
What is Financial Catastrophe?
Financial catastrophe can be defined as a situation where you are no longer able to independently sustain your financial needs. There are a few scenarios that could be described as financial catastrophe:
- Your family loses the source(s) of income that they rely on.
- Unexpected expenses exceed the amount of cash and simple credit1 you have available.
- Your expenses exceed your income, and you have no time or energy to earn more income.
Each of these scenarios can lead to devastating consequences depending on how they are handled. In many cases, a person in these situations is forced to manage them in a similar way (i.e. taking on short-term debt). This often leads them down the path of becoming crushed by an ever-increasing interest repayment.
The world makes it very easy to fall into financial ruin. Advertisements bombard you constantly to try to get you to spend more money. The system itself almost seems designed to entrap its subjects for as long as possible. And discussing frugality or positive money habits seems to be frowned upon.
All this does is create a world where people don’t know how money works and spend money to solve their problems. The end result is a world where we all suffer financially.
What Happens During a Financial Catastrophe?
Let’s talk about a few things that can happen during a financial catastrophe:
You become unable to pay your living expenses.
This may mean having your utilities, such as electricity and water, cut off from your home.
No washing clothes, no showering, no clean water to drink.
No heating, no cooking food, no access to refrigeration.
All of these are things that we rely on in modern life. All simply become unavailable if you become unable to pay for them.
Other examples, including Internet and mobile phone usage, may result in your ability to communicate with others being stifled. This is especially problematic if you rely on these for your income.
You lose the ability to pay for your mortgage or rent.
This may force you to either sell your home or vacate your property in favour of another. Worse still, you be unable to afford another property at all.
Perhaps if you live alone, this may simply be a minor setback. For some, moving back with parents would be possible, even if not ideal.
If you have a family or dependents, this becomes another matter entirely. Uprooting your family and being forced to move due to finances is the worst-case scenario.
Your spending habits become impossible to maintain.
I’ve discussed the Hedonic Treadmill before on this blog. For many people, as their income grows, so too do their expenses. They believe that now that they are earning a larger amount of money, they should be entitled to spending that money on the finer things in life.
All this does is exacerbate potential catastrophe. If your spending is constantly increasing in line with your income, then there is no limit to how much you intend to spend.
Your spending is therefore unbounded by its very nature, which is the antithesis of creating a strong financial foundation.
If you fall into this camp, you could argue that your financial situation is already catastrophic. If you’re not able to save enough to support yourself during retirement due to these spending habits, you will likely be in a difficult situation in old age. This is doubly problematic if you intend to maintain the same level of spending during retirement. Expecting to maintain the same spending without saving appropriately for it is a recipe for disaster.
You lack the means to improve your financial situation.
This is a difficult situation to pull yourself out of. There may be genuine reasons why somebody would be unable to improve their circumstances.
Illness, injury, or misfortune, can all lead to a person being unsuited to thrive in modern society. Due to the competitive nature of work and the demands of many jobs available, those of a certain physical or mental status may be unable to find work entirely.
Many people in this situation rely on government support to cover their basic needs. To add an additional layer of complexity, many of these government support programs create barriers to increasing income beyond a certain point. Benefits may be reduced or removed once a certain level of income is attained, leaving little wiggle room to improve one’s situation.
Improving one’s financial situation from within this system therefore becomes a larger challenge. Creating the means to thrive and save both for the future and to prevent catastrophic outcomes often requires a high level of both creativity and luck.
As I have not personally lived this experience, my ability to comment further is limited. If you find yourself in a similar situation, explore every option to earn an income. Social media and a drive to create may give you both the skills and the freedom to improve your situation.
You realize too late in life you don’t have enough to support yourself in retirement.
Some financial catastrophes strike immediately, demanding instant resolution. Others are more insidious, slowly poisoning your financial situation over time and only making themselves known long after it is too late. These are the most devastating of all catastrophes you can encounter.
For many people, as they age, their ability to earn an income in the manner that they did earlier in life declines. Those who specialized in a single skill to earn their income are left exposed if they cannot work in that field in the future.
This disadvantages them by stripping them of the leverage they once held over their time, forcing them to take on work to pay expenses that they didn’t account for earlier in life. In the worst-case scenario, they may not be able to work at all.
The only option becomes exhausting whatever meagre savings they have accrued throughout their life. This, in turn, may result in them becoming unable to support themselves financially and reliant on government support to meet their needs.
We cannot know if government-provided income will be available in the future. Nor can we know if it will be enough to live a “good” life. Those who fall victim to this catastrophe also have to come to terms with the loss of control over their financial situation. Therefore, this scenario is by far the most catastrophic on a financial level, as well as a psychological level.
Minimising Future Financial Catastrophe
Financial catastrophe can strike in many different ways and can affect anyone regardless of their socioeconomic position. Finding ways to shield ourselves from this catastrophe, therefore, becomes the primary objective. So, how do we do this?
Know Where You’re Headed
In some cases, we can see financial catastrophe coming. Perhaps spending habits have ballooned to a state where our income no longer covers the payments of loans or other expenses. In many cases, expenses become larger than is manageable due to overspending and consuming more than what is reasonable.
In these instances, it’s essential to know how much money is coming in as well as how much money is going out.
An accurate understanding of our cash flows allows us to anticipate future issues with our finances.
For many of us, we are reliant on cash flow to meet our needs. We can’t pluck money out of thin air, after all. We need to save money for a rainy day.
This way, unexpected expenses that cannot be predicted—such as a car failure that leaves us unable to attend our casual job—do not lead to financial ruin.
Protect Yourself
Protecting your mind and body ensures that you remain the master of your domain. If you can keep your physical and mental faculties intact, you give yourself the highest chance of having the ability to both improve your circumstances. Remaining fit and healthy improves your chances at both a higher income and a longer life. Both of these allow you to save more money in the long run.
You are your most valuable asset, regardless of the size of your investment portfolio. It’s therefore vital that you live a lifestyle that doesn’t damage your body or mind and gives both ample time to rest.
Reduce Costs
Reducing your expenses is the easiest method of preventing financial catastrophe, although it has its limits.
Discretionary spending is the easiest to cut. Purchasing less and learning to rely on yourself more to solve problems can free up more cash to save for emergencies. Negotiating reduced prices for fixed mandatory costs such as bills and utilities may also be an option.
Unfortunately, reducing costs only goes so far.
There are many people who already live in situations that require careful management of their money in order to survive. In addition, there are some expenses that cannot be predicted. For many of these people, even saving appears to be a challenge.
It’s possible you are in a position where you have no reasonable ability to save money. In this scenario, the only option is to increase your income.
Why We Save
It’s clear that one of the primary purposes of saving is to minimise future financial catastrophe.
Create a buffer of assets to protect you should your income become insufficient or your expenses become too much to bear.
The purpose of saving isn’t solely to build up more money; it’s to create a lifestyle where you don’t spend all of the money that you’re capable of earning.
This approach of living life through profiting through your actions is the cornerstone of building a saving habit. This is what gives you the ability to create a better future for yourself.
Saving some of the money that you earn is obvious. It goes without saying that spending everything you earn will result in you being unable to stop working.
The lifestyle that you’ve created for yourself becomes impossible to sustain without a consistent source of income. And there’s no guarantee that any mandatory retirement savings made by your employer or government stimulus will be enough to sustain you for the rest of your life.
Taking ownership of your lifestyle and spending habits to build a safety net of assets is therefore the most powerful thing you can do to minimise future financial catastrophe.
Closing
Life will always involve suffering and difficulty—financial or otherwise. It’s impossible to avoid this entirely. But we can control how we approach these hardships, as well as how we prepare for their inevitable entry into our lives.
Saving is a pillar of security that guards us from unexpected financial challenges, and it is integral to building a healthy relationship with money.
Without integrating the ability to save into your life, you are actively inviting financial catastrophe in instead. Instead, take steps now to minimise future financial catastrophe.
Your future self will thank you.
Thank you for reading.
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- I use “simple credit” to refer to credit cards and other pre-approved loan products. A distinction from payday loans and other unscrupulous forms of acquiring cash. ↩︎