Saturday, December 28, 2013

“It's a Wonderful Life”: How to

It's That Time of Year

In “It’s a Wonderful Life,” George Bailey makes it a regular practice to wish he had $1 million.  Instead, he gets a wonderful life, a life not without trials, but a wonderful life.  In current dollar terms, he may be a millionaire, too, but the point of the movie is that a wonderful life is not a material thing. 
The picture below is the first hint at the secret to his success.  As he wishes for $1 million, he is not on the way to buying a lottery ticket.  He is going to work; not in a job that will pay him $1 million, but he is working toward his goal, not just wishing for it.

So, we have in the picture above one simple hint about the road to the wonderful life.   Wishing is not a waste of time if it is accompanied by working to realize the wish.  Therefore, it is a working toward the goal, not the wishing for it, that matters.

Although money is mentioned at a number of points in the movie, there is never a reference to how much money George is making working in the drugstore.  That is significant.  What is important is that he is working toward an objective.  What he is doing and what he is paid are quite irrelevant.  It could have been homework, extracurricular activities, volunteer work, or just about anything else.  What is important is that it was his objective that determined his activity.  He was not just killing time or following a trend.
As the movie unfolds, we learned that he does not take his earnings from his job lightly.  Rather than buying himself sundaes at the soda fountain where he works, he later tells his father that he has been saving whatever he can.  So, not spending every cent he has is another aspect of his approach.  It is amazing how many people nowadays do not comprehend that if one spends everything one can, the result is always being broke.
But it would be a mistake to assume that George just saves.  We know what he does beyond just saving. He is also investing in his business.  His investment timing is not bad either.  Keep in mind that when he is on his way to leave for his honeymoon he turns around.  He takes all the money he had saved for his honeymoon and invests it in saving Bailey Building and Loan.  What precipitates this change of heart?  A panic.  Buying when everyone else is selling is something he takes the time to explain to the customers of Bailey Building and Loan.

Although his timing of his investment in Bailey Building and Loan is excellent, it is clear from the balance of the movie that his investment is not a get-rich-quick, short-term scheme.  He is truly investing, not speculating.  The same can be said for his purchase of a home.  He purchases a true fixer-upper, not with the intent of flipping it, but with the intent of fixing it up and living in it.  Fixing it up is simply a way to build equity in his home. It is worth remembering that he is putting money into education.  We know that since he discusses putting his brother through college. 
So let's take inventory: hard work, saving, education, investing for the long run, and building home equity.  It is unfortunate that so many people today consider those values quaint while at the same time bemoaning the fact that they are not experiencing a wonderful life.  While the connection between those values and the good life should be obvious to people, that often is not the case.  What is even more tragic is that many people never realize what George finally comes to realize at the end of the movie.  A wonderful life is not a material phenomenon.  Those values in-and-of-themselves contribute to a wonderful life, whether or not it is one of material plenty.

The movie provides more subtle hints at other keys to a wonderful life.   Some, like the role of community and family, have social implications, but this posting will stick to those that have financial implications for individuals.  Nevertheless, it would be neglectful not to mention that George's service to his community and his commitment to his family play an important role in his achievement of the wonderful life.
For individuals, it is well worth noting that liquidity, the amount of money George can get his hands on at any point in time, is not what George seeks.  One of the major themes of the movie is the dire straits.  George finds himself in when he needs to get his hands on liquid assets.  When he needs money to address problems at Bailey Building and Loan, he finds that the cash value of his life insurance policy is his only source of liquidity, and it is far from adequate for his needs.

This predicament is telling.  His investments (his home, the building and loan, his life insurance policy) are all directed toward achieving objectives other than a large mark-to-market positive balance sheet.  The movie provides many hints at why that is the case.  George forgoes a number of trips or vacations (from his honeymoon to trips to New York to a trip to Florida with a friend); he drives an old car that at times frustrates him, and his “drafty old house” provides numerous ways he could consume (from the banister knob to the kitchen appliances).  George is just not motivated by current consumption ability.  He is not measuring his success by how much he can consume.  So, why would he need a large amount of liquidity? 
Not measuring oneself by what one can consume almost defines George Bailey's life.  One senses that George Bailey knows that happiness is not a function of how much one consumes.  George's prosperity has a lot to do with the fact that material consumption is not his primary objective. It does not take a rocket scientist or deep philosophical thinker to realize that confusing consumption and happiness keeps many people from achieving either. 

In the end, George's salvation, the liquidity he needs, is there.  It is easy to overlook the implications of that source of liquidity for financial planning.  From a macroeconomic perspective, it is the general public.  One often wonders why people are surprised that in our recent liquidity crisis it was the general public that had to "bailout” illiquid institutions.  It never dawns on people that there is no source of liquidity, other than the general public.  The general public can mobilize itself as occurs in “Its Wonderful Life,” or it can occur through an institution like the Federal Reserve.  It does not matter the form it takes, it is always going to be the general public.

From a personal perspective, it is the trust that George has built up among the residents of Bedford Falls that results in the availability of liquidity to George.  It is not surprising that when there is trust, the liquidity is provided without conditions.  One can imagine that if it were Potter who required the liquidity, it probably would have come in a form similar to the loans made to banks during the recent financial crisis. 
But here's the subtle point that is terribly relevant to personal finance.  It concerns how George has built that tremendous reservoir of trust among the people of Bedford Falls.  It is easy to overlook the fact that George has repeatedly borrowed from the residence of Bedford Falls.  It could be overlooked because it is done through the Bailey Building and Loan.  Each resident’s deposit at the Bailey Building and Loan is a loan to the Bailey Building and Loan.  The residents have all been paid back with interest when requested by the depositors.  Furthermore, the residents are aware that in some instances, like during the panic, they were paid back out of George Bailey's own money.  That sort of record of managing debts naturally leads to trust.  If one doubts it, simply look at how credit ratings are affected by a history of timely repayments of all debts.