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Fixity In Personal Finance (Part 2)

Using Goodin’s paradigm of settling some issues to provide the fixity necessary for good planning, it’s worth considering which items in our financial lives should have a high degree of fixity. And putting this question into historical context, it’s also quite possible to assert that financial fixity may be in the midst of a significant change.

Ever since the end of World War II and the beginning of the Baby Boom, the bedrock item of financial fixity for most Americans has been a steady income from employment. An individual’s access to credit—to buy a car, obtain a mortgage, use credit for personal purchases—has been connected to employment: “Do you have the income to afford the payments?” Through company pensions and Social Security, the employment factor has been critical: “How many years have you worked? What is your five-year average annual income?” Through payroll deductions, an employee could buy insurance, invest in the stock market, or save for holidays. Scheduled automatic payments made sure the bills were paid. Responsible adults could start retirement planning and college funding with their first paycheck, because every program was tied to the assumption of an ongoing (and usually increasing) income.

But what if you can no longer count on a steady and increasing income as being a point of fixity in your financial life?

In the past decade, many Americans have faced precisely this dilemma. They have seen their household income decrease through layoffs, lower wages, and fewer hours worked. As a consequence, they have depleted their retirement savings, walked away from mortgages, filed for bankruptcy, delayed retirement. Because they no longer have fixity in their income, the rest of their finances have become unsettled.

The immediate response to this unsettled condition is predictable: Re-establishing a steady income. This approach is the basis for politicians promising to “create jobs,” colleges encouraging workers to go back to school, and unions bargaining for guaranteed employment for their constituents. In a financial model where almost everything hinges on a steady income, creating more jobs and/or keeping them makes sense. However, this emphasis on a steady income may overlook a larger financial reality.

The Fixity of Liquidity

The strongest point of financial fixity has always been liquid financial accumulation—or “savings.” As long as there has been money, those who have a sizable amount on hand have had the financial fixity to survive and thrive, regardless of whatever else might be unsettled.

Prior to the Industrial Age, very few people had a regular income. If they worked for someone else, their employment was often seasonal or intermittent. If they were farmers, their income was realized only at harvest. The irregularity of income gave purchasing, saving, or retiring a much different format. One’s ability to make financial progress was highly dependent on liquid financial resources, either real money or easily exchanged property (horses, land, machines, etc.). In general, less money passed through people’s hands, but when they had it, they tended to save much more of it. Down payments as a percentage of purchase were higher, and periodic payments, if they existed, were typically annual instead of monthly or weekly.

And, even during the Industrial Age, liquidity as the central point of fixity in one’s financial life has been a valid approach. It may not have been necessary, but there were advantages. Those with high liquidity tended to have lower transaction costs (they paid cash for their vehicles) and were able to act on financial opportunities (they bought distressed assets, capitalized businesses). While individuals operating from a high liquidity position may not have maximized their 401(k) contributions or driven the newest automobile, the results have been at least “good enough.”

Fixity in the Information Age?

There is a strong sense that the Industrial Age—and its employment model—may be fading. The Information Age poised to follow it gives many indications of operating from a different employment model, one that is less regular, uses contract workers as much as employees, and offers compensation packages that may include bonuses, stock options, and other irregular-income items.

If these changes reflect new trends in employment, it can be hard to predict a new point of financial fixity. What is possible is to reference what has been good enough in the past: a high level of liquidity. In time, it may become evident that some other financial or demographic factor (home equity? life expectancy?) may emerge as a strong point of fixity on which financial plans can be made. But even if something else emerges, it’s unlikely that liquidity will cease to have value. It has a long track record of being “good enough,” and many personal financial programs would benefit from making sure liquidity has a central position in their priorities.

Elozor Preil is Managing Director at Wealth Advisory Group and Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). He can be reached at epreil_wagroupllc.com. See www.wagroupllc.com/ epreil for full disclosures and disclaimers. Guardian, its subsidiaries, agents or employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.

By Elozor M. Preil

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