The financial world is always a-changing. Long gone are the ideas that riding out the ups and downs of the investment markets will pay off in the end or that your emergency fund should only cover living expenses. So what can we do to prepare ourselves for changes in the economic landscape while making sure that we can also be financially secure one day?
Let’s review a few financial areas affected by recent economic events:
Time after time, we’ve been told that the market goes up and the market goes down, but the overall result is going to be positive. But we’ve all seen that the market can be terribly volatile for long periods of time. There is no guarantee that your money with the discount broker will grow, just because you’re heavily invested in the stock market. While it’s true that what goes down will likely go up at some point, it’s all about the timing when it comes to gains and losses in the market. The timing issue really boils down to this: when you need the money, will it be there? The answer is, who knows. In order to counteract these concerns, it’s imperative for an investor to be well diversified. By scaling back on stocks and investing more in other assets like bonds and other less volatile products that act as safe investments for your money, you could put yourself in a better place when it comes to having the money when you need it.
Then there’s your risk profile or how aggressive you are as a stock investor. Previously, it was acceptable to believe that the longer you had until your eventual retirement, the more aggressive you could afford to be when it came to investing, but time isn’t everything. You also need to consider how stable your job is and how likely you are to lose it, as well as your personal feeling about market volatility. The safer your job, the more risks you can take with your investments.
An emergency fund is not just a nicety, but a necessity. The idea of having a nest egg socked away to cover your expenses in case of an emergency has been around forever. Just ask Dave Ramsey. But here’s where the ideology behind the emergency fund changes. It used to be enough to simply cover living expenses for a finite amount of time, but what about dealing with the possibility of owning bad investments? If the last few years have taught us anything, it would be the new meaning of the word “emergency.” Building your emergency fund to be able to cover stock market crashes, extended job losses and big ticket expenses is a must. Because of my age, it’s been my goal to keep several years’ worth of living expenses in the bank, as well as enough cash in a liquid high interest bearing cash account to cover the next few years’ worth of big ticket expenses such as college, weddings, and so forth. So keep on saving!
The nation’s collective attitude about debt has undergone an intense about face during this recession. In the past, it was all about borrowing as much as you can and leveraging as much as you can afford. These days, a lot of those ideas are out the door. The mantra today is to borrow carefully and only when you must. This is why: lenders are charging borrowers more and more to take out money as a way of hedging against future losses and trying to dig out from under old ones. Some words of wisdom: simply borrow when you have to (to finance a mortgage or college education) and only what you can afford to pay back; also, offer the largest down payment you can afford to make in order to lower your interest rates and fees.
Over the years, a lot of people have been depending on the equity of their homes to tide them over when it was time to draw from their assets. But as we’ve seen recently, many retirees and those approaching this stage in their lives have been caught unprepared by the latest real estate market slide. The truth is, you can’t depend on your house to appreciate in order to fund your retirement. In years past, your house was an investment: one in which you could trust to increase in value over time so that when it came time to sell it and downsize, you had a sizable chunk of cash leftover to party with or bank away. Not so much anymore. As disappointing as it is, your house is still an easy way to save. But allow me to clarify: sure, over time, the money you pay into your house turns into equity. The closer you get to paying off the loan, the more equity you have. So, when it comes time to sell, you get to keep any amount over the balance due on the mortgage. It’s like stuffing money into the bank, but into an account you can’t rob as easily as before.
This is a guest post from the Silicon Valley Blogger who runs The Digerati Life, a personal financial blog.