"Financial Shock" wealth

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trueblueky
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"Financial Shock" wealth

Post by trueblueky » Wed Dec 06, 2017 3:11 pm

https://shift.newco.co/your-financial-s ... e661ec2332

This piece uses ability to withstand a financial shock as the measure of wealth. That is, if you can easily handle a $1,000 emergency (most Americans can't), you're at that level. The larger the shock you could easily handle, the more resilience.

This is independent of net worth, as you could rely on family, a friendly banker, insurance or other resources outside your net worth.

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Sandtrap
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Re: "Financial Shock" wealth

Post by Sandtrap » Wed Dec 06, 2017 3:22 pm

Interesting article. Thanks for posting.
This makes a solid case for why an EF (emergency fund) proportional to one's income stream and investment size has a significant place in the Boglehead portfolio.
For those approaching or deep into retirement, medical "financial shocks" are the biggest potential "non - recoverable" hazards.
It is the "first tier" for a reason.
j :D

Halicar
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Re: "Financial Shock" wealth

Post by Halicar » Wed Dec 06, 2017 3:31 pm

I had a taste of this a few months ago with an unexpected thousand-dollar auto repair bill that I absorbed effortlessly. I didn't even have to dip into savings: between my credit card and the buffer in my checking account, I merely had to lower my transfers into savings for a couple of months. That was a good feeling--in the not-so-distant past that would have been a much more serious situation.

3funder
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Re: "Financial Shock" wealth

Post by 3funder » Wed Dec 06, 2017 3:37 pm

$1,000 emergency would be cake. I guess I'll sleep well tonight.

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White Coat Investor
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Re: "Financial Shock" wealth

Post by White Coat Investor » Wed Dec 06, 2017 5:27 pm

These articles make me feel so wealthy.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Dale_G
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Re: "Financial Shock" wealth

Post by Dale_G » Wed Dec 06, 2017 6:21 pm

White Coat Investor wrote:
Wed Dec 06, 2017 5:27 pm
These articles make me feel so wealthy.
That is because it is very likely that you are wealthy :D
Volatility is my friend

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White Coat Investor
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Re: "Financial Shock" wealth

Post by White Coat Investor » Wed Dec 06, 2017 6:27 pm

Dale_G wrote:
Wed Dec 06, 2017 6:21 pm
White Coat Investor wrote:
Wed Dec 06, 2017 5:27 pm
These articles make me feel so wealthy.
That is because it is very likely that you are wealthy :D
Exactly, but sometimes you might not feel like it hanging out in places like this where people are asking if $10M is "enough."
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

123
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Re: "Financial Shock" wealth

Post by 123 » Wed Dec 06, 2017 6:37 pm

Another flavor of the same theme is how much of a particular investment is it "worth it to you" to invest in. As in the article for some a decision about $1,000 is important, for others it might be $10K. $100K, $250K, $500K, $1M or maybe more more. When I think about it I guess I use the general rule of 5% of my portfolio. If a decision doesn't involve at least 5% of my portfolio it usually doesn't really matter much. I tend to slack off on re-balancing unless I"m off by 5% or more.
The closest helping hand is at the end of your own arm.

The Wizard
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Re: "Financial Shock" wealth

Post by The Wizard » Wed Dec 06, 2017 8:13 pm

Seems like a long article with nothing much to say.
I've been keeping up to $10,000 in my checking account lately to buffer irregular expenses, whether travel expenses, property taxes, season ticket bills or all of the above in the same month.
So I'm good, which isn't so surprising...
Attempted new signature...

Rainmaker41
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Re: "Financial Shock" wealth

Post by Rainmaker41 » Wed Dec 06, 2017 9:33 pm

Great article. Thanks for sharing. This really puts things in perspective and makes me feel fortunate.
My username is not about money, but is my old online gaming username. I can't say that I make a great deal of money; I just hate spending it. Married the most loving woman in the world October 2017.

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Sandtrap
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Re: "Financial Shock" wealth

Post by Sandtrap » Thu Dec 07, 2017 11:36 am

White Coat Investor wrote:
Wed Dec 06, 2017 6:27 pm
Dale_G wrote:
Wed Dec 06, 2017 6:21 pm
White Coat Investor wrote:
Wed Dec 06, 2017 5:27 pm
These articles make me feel so wealthy.
That is because it is very likely that you are wealthy :D
Exactly, but sometimes you might not feel like it hanging out in places like this where people are asking if $10M is "enough."
Absolutely true.
I'm surrounded by 20 miles of McMansions and my home is not a McMansion, nor a second or third home. "Financial Shock". :shock:
j

MrNewEngland
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Re: "Financial Shock" wealth

Post by MrNewEngland » Thu Dec 07, 2017 2:11 pm

I don't keep an emergency fund because I figure if I have a true emergency I can tap into my Roth IRA. If I had money sitting around in a money market account I'd be really tempted to use it for minor stuff.

Texanbybirth
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Re: "Financial Shock" wealth

Post by Texanbybirth » Thu Dec 07, 2017 3:00 pm

Fascinating article, I'm bookmarking it. :beer

And like someone else said, that's one of the few personal finance articles I've read that makes me feel rich! :moneybag :moneybag :moneybag

lazydavid
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Re: "Financial Shock" wealth

Post by lazydavid » Thu Dec 07, 2017 8:51 pm

I don't feel wealthy, but we absorbed a $3,500 emergency earlier this year without batting an eye. So according to the article, I am. I'll take what I can get. :P

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Re: "Financial Shock" wealth

Post by abuss368 » Thu Dec 07, 2017 9:07 pm

White Coat Investor wrote:
Wed Dec 06, 2017 5:27 pm
These articles make me feel so wealthy.
Indeed.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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Wildebeest
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Re: "Financial Shock" wealth

Post by Wildebeest » Thu Dec 07, 2017 9:48 pm

It is all what you care about. My parents opened a bank account for me when I was 6 years old and I would deposit most of the money (I would get cash for birthdays and holidays and my allowance ( 25 cents a week and I considered it a fortune)).

I was shocked to my core when I found later in life that when I needed money ( more than I had saved) for ventures , banks were only willing to lend it me to me at exorbitant fees and I when I really needed it they would not lend it, because if I really needed it it meant I was a poor credit risk.

It all worked out ( not by great intelligence, judgement or alacrity on my end ) I worked hard and stayed at it and I would love to take credit for how it worked out.

I take it to be about saving and recognizing a good deal when it comes your way and your inclinations as to what you want in life and what you care about and staying with it. And it helps to be lucky to and be at the right place at the right time.
The Golden Rule: One should treat others as one would like others to treat oneself.

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birdog
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Re: "Financial Shock" wealth

Post by birdog » Thu Dec 07, 2017 9:59 pm

The Wizard wrote:
Wed Dec 06, 2017 8:13 pm
Seems like a long article with nothing much to say.
+1
The height of cultivation always runs to simplicity -Bruce Lee

Ari
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Re: "Financial Shock" wealth

Post by Ari » Fri Dec 08, 2017 4:18 am

Another way to handle this is to avoid the risk of financial shocks. I don't have an emergency fund, but I also don't have a car (no sudden repairs), I don't own my home (ditto), I live in a country with tax-paid healthcare (no healthcare costs) and high unemployment benefits (income would not sink below my expenses in case of a job loss). Combine this with frugal living (I live on about 1/2 of minimum wage) and you get a large resilience even without an emergency fund. I pay for much of this through my government taking a lot of my money in taxes, but at least I don't have to have an emergency fund! :D
All in, all the time.

kathyauburn
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Re: "Financial Shock" wealth

Post by kathyauburn » Fri Dec 08, 2017 4:51 am

Ari wrote:
Fri Dec 08, 2017 4:18 am
Another way to handle this is to avoid the risk of financial shocks. I don't have an emergency fund, but I also don't have a car (no sudden repairs), I don't own my home (ditto), I live in a country with tax-paid healthcare (no healthcare costs) and high unemployment benefits (income would not sink below my expenses in case of a job loss). Combine this with frugal living (I live on about 1/2 of minimum wage) and you get a large resilience even without an emergency fund. I pay for much of this through my government taking a lot of my money in taxes, but at least I don't have to have an emergency fund! :D
This, to me, puts you above most health-insurance-insecure people on the true wealth scale. The differentiator is the health care, sadly. You would really have to have assets in the millions to survive a serious medical setback in at least one well-known country, and then you'd need millions more to continue living without going back to work. Your taxes, therefore, in my estimation, are well worth the expense.

Johnnie
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Re: "Financial Shock" wealth

Post by Johnnie » Fri Dec 08, 2017 12:27 pm

It's a disturbing article because the second half suggests "the rich get richer and the poor get poorer" may be endemic to the human condition - a "one-way ratchet." Overall it makes me feel hugely fortunate but totally unable to feel smug about it.

Here are some relevant excerpts from the disturbing part:
...Let’s say something goes wrong in the economy. 20% of people are going to get hit with a $1,000 shock. Maybe it’s a tax increase, or a change in health-care laws, or a problem in some sector of industry; some 20% will get hit in this round, and a different 20% might get hit another time.

...Of those 20%, maybe 3/4 can’t weather a $1,000 shock. (That’s not a crazy number; according to the Federal Reserve, as of mid-2016, 47% of Americans couldn’t weather a $400 shock.) For them, this shock is going to spiral and lead to a lot more losses; they’re going to get a permanent negative impact from this, maybe affecting their future employment prospects, or their health, or their family. That means they’ll be less able to weather the next shock, too.

Now let’s do this over and over. Each time, a different group of people gets hit by the shock, and each time, some fraction of them gets knocked down an economic class.

...That is: Each financial shock will knock some set of people down a social class, destroy part of their wealth, and redistribute the rest among everyone else. Successive shocks will hit different groups of people, but ultimately everyone will be hit by a few, so the only people who won’t get knocked down are the people who have enough “shock wealth” to survive them.

...This is the plain and simple way that income inequality can be created in the absence of any external forces on an economy.

...What you’re doing is like taking a sieve full of rocks of different sizes and shaking it. Each time you shake, more of the small rocks will fall through. Anyone who barely survived one shake is just as much at risk from the next one; only people well above the size of any of the shakes remain safe.

...Is this a one-way ratchet? Do the rich always get richer, the poor poorer?

...My grim suspicion is that this is actually pretty fundamental: power lets you acquire more power, and this means that no matter how evenly balanced a society begins, small fluctuations — even ones created by random outside events like storms and fires — will ultimately grow.

...But this doesn’t necessarily imply that the fate of society must be catastrophic. In The Origins of Political Order, Fukuyama made an interesting observation: “True freedom tends to emerge in the interstices of a balance of power among a society’s elite actors.” That is, elite actors will exist in a society, but freedom and general economic well-being both tend to happen when those actors are sufficiently numerous that they can’t align with one another, and that competition between them gives other people more effective negotiating leverage in everything from their finances to their daily lives.
"I know nothing."

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Info_Hound
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Re: "Financial Shock" wealth

Post by Info_Hound » Fri Dec 08, 2017 12:35 pm

White Coat Investor wrote:
Wed Dec 06, 2017 6:27 pm
Dale_G wrote:
Wed Dec 06, 2017 6:21 pm
White Coat Investor wrote:
Wed Dec 06, 2017 5:27 pm
These articles make me feel so wealthy.
That is because it is very likely that you are wealthy :D
Exactly, but sometimes you might not feel like it hanging out in places like this where people are asking if $10M is "enough."
+1

My kick in the rear came when my CPA kept telling me 'you can afford it.' over and over. I still do not feel wealthy, but I can afford it. :shock:

fantasytensai
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Re: "Financial Shock" wealth

Post by fantasytensai » Fri Dec 08, 2017 4:47 pm

Thought this article was intriguing until it got political. Immediately lost all appetite for information.

Dottie57
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Re: "Financial Shock" wealth

Post by Dottie57 » Fri Dec 08, 2017 4:56 pm

I could buy a new car if I needed to without going into debt. So I feel quite well off.
Not feeling smug as I inherited the savings gene from my family. Never was a big spender -even as a kid.

I've been lucky with 401k plans. Fairly good and lower ER.

I kind of stumbled into being prepared for retirement.

carofe
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Re: "Financial Shock" wealth

Post by carofe » Fri Dec 08, 2017 5:01 pm

It reminded me something that I heard once: most credit card debts in USA are coming from Car Repairs and Hospital Bills.
US Total Stock Market + Intermediate Term Bond. That's it.

carofe
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Re: "Financial Shock" wealth

Post by carofe » Fri Dec 08, 2017 5:11 pm

fantasytensai wrote:
Fri Dec 08, 2017 4:47 pm
Thought this article was intriguing until it got political. Immediately lost all appetite for information.
Yup, and I see lots of complicated "smart" sentences and over-simplification of the cause of wealth or shocks.
US Total Stock Market + Intermediate Term Bond. That's it.

RAchip
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Re: "Financial Shock" wealth

Post by RAchip » Fri Dec 08, 2017 5:43 pm

"for others it might be $10K. $100K, $250K, $500K, $1M or maybe more"

At a certain level of wealth, there is no "financial shock" you cant absorb. There is virtually no financial debt you can be hit with for $1mm other than a catastrophic liability you aren't insured for. If you are really rich, the question is how much of an investment loss in your portfolio can you withstand? If your portfolio value drops by 25-50% do you need to change anything?

Engineer250
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Re: "Financial Shock" wealth

Post by Engineer250 » Fri Dec 08, 2017 6:04 pm

White Coat Investor wrote:
Wed Dec 06, 2017 6:27 pm
Dale_G wrote:
Wed Dec 06, 2017 6:21 pm
White Coat Investor wrote:
Wed Dec 06, 2017 5:27 pm
These articles make me feel so wealthy.
That is because it is very likely that you are wealthy :D
Exactly, but sometimes you might not feel like it hanging out in places like this where people are asking if $10M is "enough."
The world is a weird place and our perspectives are critical. My co-workers make me think having a mortgage below $500k is impossible, that being in real estate and having rental properties in addition to a full time job is typical, and that vacations to resorts in other countries is routine and normal. Some of my friends have trouble finding a one bedroom to rent that they can afford, struggle with medical expenses, are very familiar with state or federal benefits that they need to live on, and probably don't consider contributing to a 401k as normal and probably don't know what an IRA or Roth IRA even is. My coworkers are critical to me that I keep striving and know it is possible to do better. My friends are critical that I realize how incredibly lucky I am and fortunate.
Where the tides of fortune take us, no man can know.

Candor
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Re: "Financial Shock" wealth

Post by Candor » Fri Dec 08, 2017 9:56 pm

Interesting take on the tax bill.

JBTX
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Re: "Financial Shock" wealth

Post by JBTX » Sat Dec 09, 2017 3:29 am

It indirectly makes a case it may be worth it to hold on to a low interest mortgage if nothing else for liquidity.

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nisiprius
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Re: "Financial Shock" wealth

Post by nisiprius » Sat Dec 09, 2017 7:40 am

There was a draft paper a few years ago, mentioned on the forum, but forum and Google search and my memory are all too weak to retrieve it. I don't know if the paper was ever published or if other work supports it. It could be important. The gist was that the writers were convinced they had found a relationship between financial shocks and health, IIRC even when the only immediate effect of the financial shock was a reduction in portfolio value. That is, the paper suggested that when your net worth is halved, it is bad for your health even if you don't need the money immediately. Financial shock results in poor sleep and poor sleep results in poor health. No, the paper didn't say that, but that's the idea I got.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Johnnie
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Re: "Financial Shock" wealth

Post by Johnnie » Sat Dec 09, 2017 10:58 am

fantasytensai wrote:
Fri Dec 08, 2017 4:47 pm
Thought this article was intriguing until it got political. Immediately lost all appetite for information.
Except, it's not political. It says nothing about public policy. It describes a conceptual model of the differential impact of ordinary financial shocks on those above and below a point where the shock impacts their ability to bounce back. And, the cumulative effect of a series of shocks over time, some systemic (a recession with high unemployment) and some individual (a $1,000 car repair).

IOW, it's about events that are the stuff of life, not the stuff of politics or policy.
"I know nothing."

Shallowpockets
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Re: "Financial Shock" wealth

Post by Shallowpockets » Sat Dec 09, 2017 11:49 am

Fires in California. I am thinking there is some financial shock there. Could you take the financial shock of losing your home entirely like that? All the peripheral costs associated with that? Not only your home, but still having to work, etc.
I think I could financially handle that.

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Re: "Financial Shock" wealth

Post by Toons » Sat Dec 09, 2017 11:53 am

I couldn't finish the article. :mrgreen:
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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abuss368
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Re: "Financial Shock" wealth

Post by abuss368 » Sat Dec 09, 2017 12:00 pm

The state of many families finances is very concerning. We must continue to provide assistance and financial education and make a difference one person at a time.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

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