-- Woody Allen
Personal finance became synonymous with investing in the stock market over the past decade. Invest your hard-earned savings in the tech-laden Nasdaq, ride out the inevitable stomach-churning dips, and reap lush returns to pay for everything from a college education to retirement. But that kind of perspective on risk and return from managing money over a lifetime was always deeply flawed.
The lives lost in the September 11 terror strike, followed by the emotional and financial trauma of the surviving families, brutally reminded Americans that the world is a much riskier place than the stock market's volatility measures reflect. And now, with the economy sinking into recession, management is handing out pink slips at a nerve-racking pace.
So it's a good time to remind investors that personal finance is not about getting rich quick. It is about organizing your money in ways that both protect your loved ones and bring you closer to the kind of life you want to lead. "What is important is having a sense of how your money is helping you move closer to your life's objectives," says Ross Levin, head of Accredited Investors in Edina, Minn.
STUFFING YOUR CASH CUSHION. With the benefit of several weeks' hindsight, what are some of the major personal-finance implications of the recent turmoil in our society and economy? If nothing else, recent events are a stark reminder that among the most powerful ideas in personal finance is the notion of spreading your financial resources around to create a margin of long-term safety for your family. Cervantes' Don Quixote de la Mancha got it right when he advised, "Tis the part of a wise man to keep himself for today and not venture all his eggs in one basket."
Sadly, the concept of diversification became suspect in the '90s. The reason: From 1995 to 2000, the best investment move was to pour savings into brand-name high-tech stocks and dot-com high-flyers. But those stocks cratered as the bear market began in the spring of last year. Stocks will go up with time, along with the U.S. economy. But prudence dictates investing in real estate, bonds, and cash, as well as international and domestic equities.
Another key tenet of personal finance is setting aside emergency savings. The saying that cash is trash was popular only a few years ago. But it has always been a good idea to maintain a cash cushion against a layoff, health crisis, or some other family emergency. And now the unemployment rate is at 5.4%, with most Wall Street economists predicting that it could easily top 6.5% in coming months.
JUST FOR THE RICH? What about life insurance? There's only one reason to buy it: to financially protect your loved ones from catastrophe. A majority of workers get some insurance coverage at work, but it's usually only one to two times salary. The Consumer Federation of America recommends a family with two children consider purchasing life insurance worth six to eight times family income.
Two common misperceptions in personal finance are that estate planning is for only the rich and primarily involves taxes. Wrong on both counts. It's about limiting risk and bringing order to your finances. And all estate plans begin with a will and written instructions, prepared according to legal rules that dictate how your property is to be distributed at death. A will is especially important to protect the financial interests of minor children and other dependents. Without a will, the state essentially drafts one for you.
Which brings up the issue of record keeping. If something happens to you, will your surviving family members, relatives, or trusted advisers be able to find all your bank accounts, mutual-fund investments, life insurance policies, and other financial assets and liabilities with ease? A will and good records are a genuine benefit to your heirs.
PLAN YOUR GIVING. Finally, there's charitable giving. Americans have been increasingly generous with their money in recent years, and now, charitable giving is surging in an outpouring of support for the victims of terror two months ago. Charitable giving works best when it is incorporated into the core of a financial plan, on par with saving for retirement.
The recent rally in the stock market suggests that investors are anticipating an economic recovery sometime in 2002. But now is an opportune moment for everyone to look beyond their short-term investment portfolio goals and construct a better financial plan for uncertain times. Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BW Online