A valuable financial lesson inspired by and adapted from the Aesop’s fable I read to my 20-month-old daughter.
In the height of summer (the good times) the grasshopper frolicked, played, and sang (spent), whilst the ant worked hard to collect enough food (saved) for the winter (the bad times). “Come and play with me!”, said the grasshopper. “I’m busy collecting as much food as I can for the winter. It’s coming soon and there will be nothing to eat when it does”, said the Ant. “Winter is ages away. I’ve got plenty of time!”, replied the Grasshopper. And just like that, days quickly became weeks, and the chill of winter was on them in a flash. Food became extremely scarce. Nestled in his warm home, the ant had more than enough food to get him through the winter (the bad times). The Grasshopper, stuck out in the cold, regretted having frolicked, played and sang (spent), so much, and not having collected enough food (saved) during the summer (the good times).
In my time working in financial services, one of the greatest lessons I’ve learnt is that there are bad things that will come along and derail our finances if we are not careful. These bad things are unexpected, sudden, and costly. They often come in multiples. We may not know what they are yet, but we can be prepared for them come whatever may.
In the good times you should aim to be the ant more than the grasshopper. Enjoy the fruits of your labour, but also save as much as you can for a rainy day. This was often the first recommendation I would make for clients. It is vital. There are two prominent examples of the necessity of this in recent years.
The drought
The drought that ravaged South Africa, and particularly the Cape, put our farmers under massive pressure. Most of them survived but with contrasting fortunes.
Those who had adequate cash reserves were able to find workarounds: accessing water for their crops and feed for their livestock without having to borrow money or sell any key assets.
Those who did not have adequate cash reserves were forced to sell land, slaughter their livestock early (thereby driving prices down due to oversupply and leaving themselves vulnerable in future years) or borrow the money that was needed. They had to sell key assets or load up their balance sheets with debt just to survive.
COVID-19 business and career chaos
COVID-19 shut down multiple industries nearly overnight. Businesses that did not have cash reserves were in dire straits. Unable to operate properly (or pivot), many of them were forced to close. Many people lost their jobs and without cash savings or an emergency fund had to borrow money to keep a roof over their heads and food on their table. The long-term implications of this will be felt for years to come.
Opportunity
There is always an opportunity, especially in the bad times. Having cash reserves can be seen as overly conservative by some, but it can also be a brilliant way of taking advantage of fantastic opportunities that will come along.
As Morgan Housel discussed in his brilliant book “The Psychology of Money”:
“You don’t need a specific reason to save…You can just save for saving’s sake. And indeed, you should. Everyone should.
Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.
…Savings without a spending goal gives you options and flexibility, the ability to wait and the opportunity to pounce. It gives you time to think. It lets you change course on your own terms.”
Let’s all aim to be diligent ants (most of the time) in the good times so that we can be safe, and maybe even opportunistic, in the bad times.
Written by Brendan Dunn for Honest Money Podcast
Portfolio Management Support at Galileo Asset Managers
