September 29th, 2008 |  Print This Post |  Subscribe in a reader | Subscribe by Email |  

With the current state of financial decline on Wall Street, it is almost automatic that I muse over everything that I have learned over time from various sources, about creating a nice financial cushion for the present future and distant future. Interestingly enough, Diversification, prudence – diversification, prudence is the cadence constantly playing in my ears.

In the last eight years (2000-2008), the state of the U.S. economy has been quite rocky. It seems recently all the government has been doing is putting out little fires here and there, but not really nipping the national economic issue purportedly proliferated by the greedy, in the bud. Regardless of that, I have a number of friends and acquaintances who have been relatively shielded by the craziness since it reared its ugly head and these ladies and gents are people with salaries ranging from about 30,000 to around 200,000 U.S. dollars. Below are some of the mutually inclusive habits they have in common.

Good Rules They Apply

1. They don’t have all their investment eggs solely in the Wall Street basket. Their diversification goes beyond diversifying among companies and asset classes.
2. They put enough money away in some sort of retirement account, such as IRA, Roth IRA, or 401(k) accounts.
3. They are effective at regularly saving, and have a fair share of their net worth in regular savings accounts, which are 100% FDIC insured up to $100,000 (at the time of this writing).
4. They use credit sparingly, and when they do, pay off their balances by the end of the month.
5. They typically save up or use available money when making large purchases.
6. They don’t own more house than they can afford.
7. They don’t have more cars than they can easily afford or maintain.
8. They keep their comfort and entertainment expenses within a manageable capacity.
9. They immediately adjust their standards of living if external factors begin to affect their cash flow (albeit temporarily).
10. They do not unrealistically try maintain a standard of living by playing musical chairs with debt.
11. They live within their means and are not “greedy”. See, Avoiding money traps.

12. They stick to a realistic budget, and monitor their income and their outgo.
13. They do not stretch their finances or play financial roulette.

Some Things Worth Noting…

1. Only invest money in line with your comfort level, and based on how much you are willing to lose (often termed as risk aversion). Over time the market provides the best return on investment, but then that time and patience has to be freely available.
2. It is in each person’s best interest to have an immediate float of dollars just in case everything else around you goes amok financially. During this “Wall Street Bailout” crisis, when looking at corporations, the likes of Bank of America and Berkshire Hathaway (as well as some others) had pools of available cash that made it possible to continue daily activities. At a high level, American International Group (AIG), Merrill Lynch, and the late Lehman Brothers apparently shunned that prudence. The lesson learned from the fallen giants is that everyone (corporations and individuals) needs access to cash that is readily available. This makes it possible to continue surviving daily until the situation stabilizes. On the extreme, if all your wealth is in your house, or other assets that cannot be easily turned into cash, you don’t want to have to liquidate them just to be able to gas up your car.
3. Given the recent “credit crunch” caused by the real estate slump, and its preceding tech bubble burst, it is probably not a good idea to privatize social security (or at least not all of it). Doing so would leave it to the whims of Wall Street and thrust it into the hands of the street’s ‘hustlers’ and ‘players’.
4. In a country plagued by credit and the constant need of it, time and time again, it can be proven that  we are better off living on what we immediately own, as opposed to constantly using credit as a cash flow vehicle (obviously there would be exceptions). Credit works for many, but as everything tends towards entropy, it is very easy to get carried away, and it takes immense discipline to control credit use. When there is a credit crunch, those that hurt the most are those relying heavily on the use of credit.

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