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21st Century Financial Lessons

Economically, the first decade of the 21st Century has been, to put it mildly, “interesting.” It’s been a bit like riding a bobsled down a Black Hills slope, scooting up the other side, going off a steep cliff, and landing softly in a haystack.

It would be understandable for small investors, looking back on the past ten years, to conclude that they would be just as well off to bury their extra cash in pickle jars in the back yard. Understandable or not, that would be exactly the wrong approach. Instead, here are a few lessons small investors should take away from the last decade:

1. Building an emergency reserve to cover living expenses for six months to a year isn’t just a good idea, it’s a necessity. Having cash available can help you ride out a job loss, get through a business slump, or avoid having to take money out of investments when their value has declined.

2. Retirement will happen, sooner than you think. Start early and be consistent in investing at least 20 percent of your paycheck in your 401k, IRA or SIMPLE plan.

3. Budgeting is not a dirty word and neither is a personal income and expense statement. Tracking your spending and creating a plan for how you will spend your income is a necessary survival skill in the 21st century. Those who choose not to use this skill will not gain and maintain financial independence. There are numerous free tools available, such as Mint.com and Quicken, to help you.

4. Understanding and managing your thoughts, feelings, and beliefs about money is as important as understanding how money works. Exploring your money history and learning to identify your unconscious beliefs about money can change your financial behaviors forever. It is crucial to gaining and keeping control of your finances and becoming comfortable using money as the valuable tool it is.

5. Avoid consumer debt. If you can afford a credit card payment after you make a purchase, you can afford to save first and make the purchase in cash.

6. A house is a home, not an investment. Don’t buy more home than you can afford, and don’t buy a home without a down payment.

7. Real estate doesn’t go up forever, and neither does anything else.

8. Price declines, even crashes, are a normal part of investing. If you are going to invest, it’s essential to understand that the value of your portfolio will fluctuate. Be prepared to ride out downturns. Selling in a down market is “the big mistake” that will cost you dearly.

9. The fundamental strategy for managing market ups and downs is asset class diversification. This doesn’t mean having money in different banks, with different brokers, or in different mutual funds. It’s about having a good balance of mutual funds that invest in U. S. and International stocks, U. S. and International bonds, real estate investment trusts, commodities, market neutral funds, Treasury Inflation-Protected Securities, and junk bonds.

10. The foundation for everything else on this list is learning to live on 70 percent of what you make.

The final point may sound unreasonable or even impossible for anyone who is just starting out, raising a family on a limited budget, or getting by from month to month. Certainly, it isn’t easy. But one of the most valuable financial habits anyone can develop, beginning with the very first paycheck, is to save something for the future instead of spending everything that comes in.

It’s ironic, but the most important financial strategy for the 21st Century may be plain, old-fashioned frugality.

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10 Responses to 21st Century Financial Lessons

  1. GetFreePublicity January 18, 2010 at 8:22 am #

    All lessons were great but I totally agree with #6 “A house is a home, not an investment. Don’t buy more home than you can afford, and don’t buy a home without a down payment”

  2. Jon January 18, 2010 at 8:32 am #

    Regarding #10 – One of the ways I’ve advised young people to get into the swing of saving up for emergencies, retirement, etc. is to at the very beginning of their careers, invest at least enough pretax $$ in their employer sponsored 401K plan to get the match. As they move forward in their career, each time they get a raise, they should instantly increase their contribution percentage by half of the percent amount of the raise (if the 401K plan doesn’t have any really good long term investment options available, this time is a good point to start an IRA elsewhere and use automatic payments to fund it). By doing this, they’ll never miss having the money in their budget, will live on less than they’re earning, and will have their retirement well-funded when the time comes. Once the pretax options are maxed out or at a target %, they can start a Roth, as well.
    An emergency fund is crucial, as well, but the same sort of process will work; start with a small percent, and increase it a bit every time income increases.

  3. Susan Hotalling January 19, 2010 at 8:57 am #

    The best advice I can give to homeowners besides the statement of #6 is have a game plan to payoff that house quickly. We gave ourselves 6 years and got it done. Okay, so you don’t get to own quite as much castle as you wanted and maybe not quite as hot a set of wheels, but you are now in a position to contribute appropriately to your retirement with no excuses!

  4. Terry Rabb January 19, 2010 at 5:06 pm #

    Thank goddness someone said it: Your house is a home not an investment vehicle. So many of my over 50 yr old friends totally forgot….and now they have no retirement or home.

  5. Octavia January 30, 2010 at 5:03 am #

    I want to thank you for sharing what you know is proven to be true. I’m 55 and still learning!! It’s never too late! I am a living witness!!!! Keep up the good work!

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