Principle #3: Living on the Edge

The Mecklings* were a family that liked to play. Joseph Meckling made a good living and had been used to giving his wife and children expensive gifts. The Mecklings felt fairly secure with their current lifestyle because they had all the neces- sary life and medical insurance, paid their taxes on time, and kept up with their mortgage. However, they spent all the surplus money that came into the household on watercraft and extra cars. Joseph also liked to take his wife, Gentry, on exotic vacations every year, even though they would usu- ally go into further debt for at least four months to pay for the trips. The Mecklings felt like they had life pretty much under control, despite their extravagant tastes, until Gentry became ill with cancer. Within two months, her medical expenses had exceeded $30,000. Even though the Meckling’s out-of-pocket expense for Gentry’s initial surgery and subsequent treatments was only $3,000, it actually blew them apart financially. This was because the family was not aware of their real financial situation and had been living closer to the edge than they thought, just barely making ends meet but not realizing it. “All I could think of was how I was going to come up with $3,000,” said Joseph. “These medical bills were so totally unexpected. I mean how could we have known anything like this would happen to us? We felt like we were living life pretty much like everyone else around us. All our neighbors were doing the same things. I couldn’t really see how we could have prepared for anything like this.” Although Gentry’s prognosis was very good, and most of her medical treatment had been completed, the family was totally stressed out. At a time when Gentry needed to be concentrating on getting well, she and Joseph were actually considering bankruptcy because they had not saved even $3,000 to cover the medical costs she had incurred over the previous four months. 

What’s more, it had not occurred to the family that they could resolve their financial concerns immediately if they were to sell one of their two motor boats. There’s no doubt that Joseph and Gentry found it easy to spend money. Their problem was that they had not “spent” that money in the right place, allocating some of it for emergency needs. As we mentioned in Chapter 2,claiming that you never dreamed anything could go wrong is the ultimate game people play with themselves to avoid taking responsibility when emergencies occur. Financially secure individuals understand the power of preparing for emergency situations by living within their means and putting money away for a rainy day. In Tony Cook’s article “Secrets from ‘The Millionaire Next Door,’” which appeared in Money magazine and The Reader’s Digest, Cook reports on the best-selling book The Millionaire Next Door by Thomas J. Stanley and William D. Danko. Cook notes that in order to learn what today’s millionaires have in common and how they accumulated wealth, Stanley and Danko sent questionnaires to affluent Americans. They found that “about two-thirds of those millionaires aren’t trust-fund babies; eight out of10 accumulated their riches themselves. Most are extremely frugal. Although their average net worth is $3.7 million, they generally live so modestly that even their neighbors don’t have a clue about their wealth. Unlike these millionaires, the Mecklings certainly weren’t living frugally and were very intent on maintaining the same lifestyle as their neighbors. So when things went wrong, the family was devastated. 

The Mecklings made $72,000 a year, which means that after 40 years of work, $2.4 million will have passed through their hands. With that in mind, we have to ask why $3,000 should hurt so much. If they had actually declared bankruptcy, they would have cheated their creditors simply because they wanted extra boats, jet skis, and other toys. Would declaring bankruptcy be fair in this case? Would it be honest? In order to be prepared for emergency needs, it is advisable to accumulate at least three months of spendable income, and ideally to save one year’s worth of net earnings. As we have already stated, the best way to do this is to commit 20 percent of your savings to this emergency category.