Depression babies learned early that “saving for a rainy day” was not something one hopes to do but a requirement. The saying originated when most people worked on the farm. And when it rained, the fields were too wet to plow, and the farmer — not to mention the hired hands — made no money.

Of course, my grandfather was the diligent sort who would use rainy days to do required maintenance on his implements, noting with derision other farmers who spent rainy days at the bar in town. He believed they would surely end up with broken equipment when the sun would reappear, keeping them from making hay.

So the idea of savings is not necessarily the return one receives on the money that’s socked away, but the piece of mind that, when the weather doesn’t cooperate, the saver has a little stash to tide him over. Of course, the vast majority of us don’t have to worry about the weather.

But an economic storm hit a couple years ago and plenty of people have not had work, rain or shine. Those who took heed of that old saw have no doubt weathered the storm better than those who didn’t. Most financial advisors recommend that a person have three month’s worth of living expenses saved — and some say six months worth, just in case. But how many people heed that advice?

There is no caveat to the counsel that says, “Keep six months of savings around if the money is earning at least six percent.” Even if the money sits there all shiny, not earning a thing, it’s the liquidity and insurance against the unknown that’s the issue.

Unfortunately, a central bank’s debauchery of the currency serves to raise people’s time preferences and impair their judgment. In a blog post recently, I highlighted the advice of life coach and author John P. Strelecky, who advises people to spend their tax refunds on an experience they will remember forever, rather than saving the few hundred or thousand dollars that the IRS may be giving back.

Continue reading →