We’re all searching for security in one form or another, whether it’s security in the form of personal safety and protection or security in the form of freedom from anxiety and fear. With our world turned upside down by the failure of financial, retail, and manufacturing giants along with rising unemployment and fears of a global depression, the search for financial security takes on a new level of importance.
Here are my seven keys to acquiring financial security:
1. Live on less than you earn
It’s the first key to achieving financial independence and security. Living on less than you earn means delayed gratification and it isn’t always fun in the short term, but it’s the best way I know to finance your long-term goals. Ruthlessly examine your current lifestyle, and if you see a lot of spending that is unnecessary, reverse course and think of it as found money, quickly depositing it into your savings account.
2. Invest in your own stock
Your ability to generate an income, based on your education, skills, and experience, is the single most valuable asset you own and is vital to your personal financial security. It is what puts food on your table and a roof over your head and it can’t be wiped out by a stock market crash! Thank goodness. Maintain your ability to generate an income through continuing education, additional training, your own personal development, and by seeking ways to make extra money on the side. If you work in an industry where layoffs are the norm or an industry that is struggling, consider changing careers or relocating to an area where the economy hasn’t been as adversely affected by the recession.
3. Insure yourself and your loved ones
I can tell you from personal experience that adequate insurance is a MUST for achieving financial security. Always protect yourself from the biggest potential risks in your life — serious illness, disability, and death. Most people are disastrously under insured, especially if they become disabled. When an emergency rears its ugly head, you’ll never regret having “wasted” all that money on premiums for insurance you “didn’t need.” Don’t go overboard, but always make room in your budget for the proper amount of insurance. I usually ask myself, what would be the first 10 things to happen if [X] occurred? It’s a sobering reality to talk with people who put off getting insurance and regretted it when the impossible happened.
4. Pay yourself first
If you never seem to have any money left over to save or invest, send yourself a bill! When you get a bill for your electric company or your car payment, it has a high priority so use that same idea and bill yourself for your savings account. Be specific. The mortgage company knows to the penny how much they want from you each month so use the same tactic on yourself. Then pay your regular monthly bills, finishing up with that blasted credit card bill. If you’re having trouble paying it, cut your discretionary spending, but always pay yourself first.
5. Avoid borrowing money
Have you ever met someone who’s financial security was compromised because they didn’t borrow enough? I haven’t. Only use credit for purchases that appreciate such as a home or a college education. Some people advocate borrowing to buy a car, but having paid off nine different car loans in my life, I wish I had never gotten started on that path. Pay cash for everything: automobiles, clothing, entertainment, furniture, travel, and electronics.
6. Invest in boring things
Uncle Warren (Buffet) says that he only invests in things he understands. He also says he prefers to shoot fish in a barrel — after all the water is drained. His investing philosophy has served him well for decades and cannot just be attributed to luck but to sticking to an investing philosophy that worked. If Buffet played baseball, he would swing only at pitches that would get him to first base and wouldn’t worry with trying to hit a home run. Likewise, we should concentrate on achieving good returns rather than the home run (Bernie Madoff anyone?). Avoid volatile stocks, initial public offerings, buying on margin, and commodity trading. Don’t try to time markets, because no one does it consistently well, though it does make sense to pay attention to what the large institutional investors are doing. Have the patience to wait out the occasional (and inevitable) bear markets, and unless you’re willing to dedicate yourself to becoming an industry guru, stick with index funds rather than individual stocks. If you’re not willing to become a guru, have the self discipline to stick with what works — index funds.
7. Diversify, diversify, diversify
Just a few years ago, you would have been considered a wise old sage for investing your retirement cash heavily into real estate and popular stocks like Starbucks, Bear Sterns, Chicos, and AIG. Where are those real estate prices now? Where are those company’s stocks now? When those popular stocks were flying high, putting money into safer investments like bonds, CDs and less volatile blue chip stocks was considered wasted opportunity. Diversification into safe investments was boring. But successful investors have always known that any one class of assets, stocks, real estate, bonds, CD’s, cash, or even business limited partnerships, will have its day in the doghouse and its day in the sun with a lot of average, slow growth days in between. That’s why you’ve got to own most if not all of them, in a mix that’s right for your age, income, family responsibilities, and risk tolerance.