Former president John F. Kennedy is generally credited with coining the phrase "A rising tide lifts all the boats" in a 1963 oratory in Frankfurt, Germany. Ironically, a day later in West Berlin, Kennedy delivered his famous "Ich bin ein Berliner" speech, which allegedly (subsequently widely debunked) translated into "I am a jelly doughnut". Winchell's stock probably rose five points that day.
Jelly doughnuts are symbolic of the solution to the problem most face today with the reverse of the "rising tide" phenomenon. No longer are asset values automatically rising as they were during the speculative wealth-grab era that arguably started during the first term of Ronald Reagan's presidency and continued, with few significant macroeconomic corrections, until the housing bust began in mid-2007. The era of speculation and rampant consumption, which followed parallel arcs for over 20 years and were largely fueled by leverage, skidded to a halt shortly thereafter, spreading like a contagion throughout the country and, ultimately, the world. As a result, many asset classes continue to diminish in value today, wreaking havoc upon personal, business and governmental balance sheets.
So how do jelly doughnuts typify the solution to the problem? Much as the world has gone into reverse, so must spending and savings habits.
Step one: take the steps necessary to create a monthly profit
Remove the fat. Jelly doughnuts: out of the budget. Unless you're a Winchell's franchise holder, doughnuts (and the like) are perhaps the simplest item to remove from your spending patterns. The same holds true for beer, Doritos (man, their taco chips are something else), milk shakes, Starbucks, Baskin-Robbins hot fudge sundaes, double quarter pounders with cheese, and other similar luxuries — not to mention gambling at the local dog track, buying your 35th pair of shoes, and any other utterly unnecessary expenditure. If you're a wage earner with stable employment, income is generally highly predictable. Calculate mandatory expenses such as housing, term debts, true food costs and standard and ordinary operating expenses and subtract them from take-home pay to determine your net discretionary income — i.e., profit. Don't take these steps one month and then revert back to your old patterns. Do them every single month. A minimum target should be 5% of your take-home pay.
Step two: include long-term savings into your mandatory expenses budget
Short-term savings are critical to supplement unforeseen one-time expenditures, vacation costs and other current expenses. However, those savings are generally highly accessible and thus should not be solely relied upon for equity generation. Tax-qualified accounts such as an IRA, a 401k or 403b, or fixed unqualified savings such as annuities, certain types of life insurance products, profit sharing plans, long-term bonds and similar investments qualify in this category and should be maximized to the extent possible. A good target figure is 5% of your income. For most, contributions to IRAs or 401ks are the most convenient and effective mechanisms for this purpose. Although significantly reduced due to the down economy, 401k programs may still have employer matching features that further improve equity creation. Furthermore, contributions are made on a pre-tax basis, so the impact upon take-home cash flow is lessened. Remember: the inclusion of long-term savings must become part of the equation. Net spendable income will be reduced, but compensate by further reducing operating expenses. After a period of adjustment, you won't even notice the slashed jelly doughnuts budget.
Step three: reinvest your profits
Whether your net discretionary income (profit) is $100 or $1,000, reinvest it. No, that doesn't mean rewarding yourself with a Winchell's run or five cases of beer. If you have credit card debts, make irregular (and frequent) principal pay-downs. If you've got a car loan, do likewise. Most financial advisers recommend lump-sum payments against obligations that have the highest interest rates. Although sound advice, thought should also be given toward targeting debts that can be retired the most quickly, thereby eliminating the monthly payments altogether and effectively giving yourself a raise — which can then be applied toward further equity-building: savings and/or debt reduction. Whereas taking on debt can create a negative spiral, its retirement can be a catalyst toward a positive upward cycle.
Step four: be redundant
Don't rely upon the rising tide lifting all boats. Put as much as you possibly can against debt and/or into savings every single month, and do so until you're rich and famous. Don't rely upon one-time income such as bonuses or tax refunds or hope you'll someday inherit your way to financial security; taking even small but highly significant steps as outlined above will build equity on your personal balance sheet.
Step five: don't be a jelly doughnut
Germany had one of the highest savings rates in the world in 2009, rising to a 16 year high of 12.8%. If you can get yourself into a repeatable, permanent equity-creation habit, you can say it loud and proud: ich bin ein Berliner. That still doesn't mean you're a jelly doughnut.
Sources:
- HistoryPlace.com (accessed on 12/4/11)
- NewYorkTimes.com (accessed on 12/4/11)
- Forbes.com (accessed on 12/4/11)
Walter McLaughlin - I am a 47-year old commercial banker living in the Seattle area. I am an avid sports fan, but also greatly enjoy writing satirical, ...
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