Monday, September 12, 2011

Save More Money, Austrian way

Clouds of financial storms are covering all the visible horizon and it looks like it will sooner or later turn into a heavy rain. When, how strong and how long is the question. So, it is very critical now to think about the financial future and prepare as much as possible. As old saying goes: "Plan for the worst, hope for the best".

What should young people do to prepare themselves for the future and improve their finances? Young people usually have relatively less savings and relatively high debts compared to older people. This makes them more vulnerable to financial crisis. Especially many of them who live from paycheck to paycheck. My Advice to Young People, by Robert P. Murphy from Mises Institute has recently been published in Mises Daily. Go and read the article and reread again but I would also like to summarize some of his key points here. Actually, it is very wise to regularly read Mises Institute Daily to balance the Keynesian bullshits pumped by mainstream global media everyday!

1 - Save more. When you save more, it is good for you. And when you save more, it is also good for others and your country! You can increase your standard of living through saving. We know it very well in Asia, where economies are rising on savings. Murphy advises young people not to listen to main stream economists and feel guilty with saving. Mainstream economists, under influence of Keynesian ideology, try to make you believe that opposite is true: "If you save, others lose". "If everybody saves, everybody loses":

"In the current recession, it's actually more important than ever that people save more. Contrary to Keynesian warnings, if households and firms save more, they will actually speed the general economic recovery."

2 - Develop Multiple Streams of Income. This is where Murphy differs. A typical "save more" advise means "if you are saving 5% of your income, stop eating out, hanging out, going to cinema, etc, and save 25% percent."  Although Murphy admits that reducing frivolous expenditures is an obvious way to save more, he tells that this is not the main way of saving more.

The best way to save more, especially for young people, is to boost one's income, not cut spending. For young people, there may not be much room to cut a lot but in theory, and surprisingly in practice, there are a lot of space to increase income. Murphy does not simply advise young people with a day job to have another night job. He does not advice a young worker to find another boss. Instead he says that "young people should consider a host of entrepreneurial ventures" and "rather than looking for other bosses, young people should become their own bosses, at least in a few limited areas.":

"To some people this suggestion may sound intimidating. But notice that plenty of young people are entrepreneurs and they don't even realize it: Anybody who babysits or cuts lawns for neighbors is an entrepreneur. Such kids have to find customers (usually through word-of-mouth) and provide a service for which they get directly paid. That's what an entrepreneur does.

When I have mentioned this recommendation in public settings, sometimes students ask me what sorts of businesses they should start. The short answer is, "I don't know; that's what you need to figure out." The entrepreneur looks around and identifies a product or service that people currently lack but would be willing to pay for, in such amounts as it would be worth the entrepreneur's money and effort to provide it."

3 - Sell your TV. This bulky, archaic machine actually has no place in a young couples home! You can watch TV when you get older. For now, use your computer to watch things on demand and remove this productivity killing machine from your home so you can concentrate on finding extra income streams.

4 - Build Up at Least a Month's Worth of Expenses in Cash. This is the first step to get out of highly vulnerable "living from paycheck to paycheck" life. Obviously, this will make you less vulnerable to unexpected expenses and lay-offs but the main purpose of this step is much more physiological: "pay-check-to-paycheck mentality is destructive for your inner entrepreneur"!

5 - Tithe or charity. Avoid focusing on yourself and share a bit of what you have with others. First, you will develop a habit of looking beyond your "self" which will avoid things like pulse purchases.

6 - Eliminate Variable-Rate Debt as Quickly as Possible. We have had a very long period of artificially low interest rates thanks to American money printing machine but when the party ends we will pay back as higher than usual interest rates for a long period of time.

7 - Acquire Some Physical Gold and Silver Coins. Future of fiat money (money whose value only depends on faith rather than a real commodity, all currencies in circulation now) looks bleak so keeping a significant portion of savings as a physical, real value item, looks wiser than ever now.  

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