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The Two Types of Financial Optimism

How you can prepare for hard times the right way

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I’ve frequently written about how savers are losers. And it’s true. In an economy that runs on debt and thrives on inflation, there is nothing more financially dangerous than thinking your savings will provide a secure financial future.

Well, almost nothing.

The optimism bias

A new report issued by reveals something even more financially ignorant than relying on savings—thinking you don’t need any savings at all.

The survey reveals that nearly half of respondents don’t have enough savings to cover three months of living expenses should a financial emergency happen, and 25% have no emergency savings. But perhaps even more alarming is that 18% believe that’s ok and that a financial emergency won’t happen to them.

An article on the survey in USA Today goes on to share that this passive attitude to emergency savings most likely comes from the fact that people don’t see others in their life have hard times, and so they don’t think it will happen to them. Psychologists call this optimism bias.

Two types of optimism

I’m a big fan of optimism. In fact, I don’t think you can be successful in life if you don’t have a good dose of it. But there are two kinds of optimism. One type is grounded in reality and the other in fantasy.

Optimism grounded in fantasy says, “Nothing bad is going to happen to me and I’ll always be taken care of so I don’t need to worry about money.” Or perhaps a more dangerous form says, “I know I need to do something about my finances, but I’ll have time to do that later.” Of course, later never comes.

Optimism grounded in reality says, “It is inevitable that I will find myself in hard times financially, but I know that I can outsmart those hard times by investing in my financial education.” This kind of optimism acknowledges reality while also preparing to be the captain of your own financial ship.

Simply put, fantasy optimism trusts in forces outside your control to keep you safe. Realistic optimism trusts in your own ingenuity to keep you safe.

It’s ok to save for a rainy day

Though I often rail against savings, I actually do believe it’s important to have liquid assets on hand should hard times come. Kim and I have six months worth of living expenses available should we reach hard times.

Rather than keep these in cash, we keep them in liquid assets like gold and silver that can be quickly converted to cash if needed.

We do not, however, count on our savings as part of our investing or retirement plans. Rather it is simply there for that rainy day, should it come.

Savings are not enough

When I say savers are losers, I’m talking about those who think savings will be enough to help them have a secure financial future. This is an old way of thinking that doesn’t take into account how money has changed, that it is a currency that loses value if it just sits and isn’t invested.

Because we live in an inflationary economy, cash loses values over time. On the other hand, assets rise and fall in value relative to inflation. If you want to thrive financially, you have to learn how to identify the right investments for you money to flow into and how to find assets that create cash flow. This is what we call investing.

Another good kind of savings

Outside of emergency savings, another good kind of savings is money set aside specifically for investing. We call this pay yourself first. You should treat your savings for investing not as part of your asset column but instead as part of your expense column on your balance sheet. It is your most important expense, more so than any other and should take first priority.

When Kim and I were young, we did this much to our bookkeeper’s lament. If we didn’t have enough money to pay our bills, we pushed out what we could or negotiated with our bill collectors, but we never pushed out our investment savings.

Use your investment savings to buy cash flowing assets

As you save your money for investing, you should also work on identifying the right asset your want to invest in that will produce cash flow at the right return. This could be real estate, a business, or technical stock trading—whatever you’re interested in.

This takes financial intelligence to do, however, so you must invest in that as well, and the biggest cost will be time for that.

As you grow in financial knowledge you’ll also grow in confidence that you can tackle any finance challenge that comes your way: realistic optimism.

The good news is it’s never too late to start investing in your financial knowledge, building your emergency savings, and creating your investing savings. And starting today is the surest way to make sure you don’t end up as a financial loser.

Original publish date: July 03, 2018

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