Effective plans for the future require at least two perspectives.
Many American families are forging a new frugal lifestyle, shopping in second-hand stores, using coupons, and sharing housing. Concerns regarding job security, retirement shortfalls, and weak investment returns have left many feeling threatened that the American dream is no longer achievable.
As Americans "reboot" their dreams and reset financial priorities, it is important to adopt the attitudes and practices of both accountants and economists. Accountants base their projections of future revenues on actual income and earnings, while economists devise forecasts based upon sophisticated modeling tools and "what if" scenarios.
Wearing these two hats can help you to better evaluate your capital foundation: human capital (ability to earn income), financial capital (return on investments), and emotional capital (capacity to handle risk).
First, form a base estimate with the accountant's green eye shade. It should include today's bank account balances, employment income, investment returns, and liabilities (all outstanding credit-card bills, loans, and contractual commitments.)
Then create more optimistic projections with the outlook of an economist. Devise alternative scenarios with the assistance of online financial calculators. These tools can help you to vary spending estimates, income from new employment, housing expenses, and various asset allocation scenarios for your investments.
While retooling your finances, keep in mind the following seven rules for regaining financial security:
1. Manage risk. Identify your exposure to health problems, accidents, disability, unemployment, and long-term care – and consider insurance to avoid the financial losses that accompany such life experiences.
In terms of investing strategies, take your age into consideration. For investors above age 50, capital protection should be the focus. Younger investors should selectively use a dollar-cost averaging strategy to invest in longer-term equity markets, contributing the same amount periodically over time to smooth out the effect of swings in the stock market.
2. Secure your short-term financial stability. Fund a six- to eight-month reserve of your current monthly expenses and invest that money in an insured bank account for quick access.