WASHINGTON. As we discussed in our introductory “Investing 101” column, we intend each Investing 101 “episode” to deal with the basics of a given investment. But before we get down to discussing specific investment choices, you’ll want to check your current financial status. It’s critically important to make sure you’ve covered several bedrock financial items that should always be in place before you even start to invest. These elements of financial security involve personal savings, insurance coverage, and personal wills.
What if you get a pink slip tomorrow? Do you have any savings? How’s your financial security?
If we learned anything from the Great Recession and its aftermath, it was this. You need all the financial security you can get. Beyond a basic bank deposit, no matter what you invest in—stocks, bonds, real estate, commodity futures or precious metals—you will have wins and losses. Absolutely nothing is guaranteed in the wonderful world of investing. That’s doubly true if the guy touting an investment says it’s guaranteed. It’s not. (And you should report this guy to the SEC)
Even worse, sometimes, as in 2007-2010, you might end up losing nearly every dime you’ve invested. That’s the way things sometimes work in life.
For that reason, even if you feel you’re all set to get fund your investment portfolio, pause for a moment and ask yourself the following key questions regarding the first element in your financial security plan – a liquid cash cushion.
- Since investing is risky to a greater or lesser degree, am I really prepared for the little surprises that life itself will often throw in my way?
- In case I get laid off (a clear and present danger for most individuals), do I have at least 6 months or more of my take-home pay squirreled away somewhere in CDs or a stable bank account? Or perhaps in a brokerage house bank account or money market fund?
- If I do get laid off, is my cash stash liquid? I.e.,can I get at these funds right away if I need it, or do I have to pay a huge penalty?
Some investors and potential investors see no point in a liquid cash stash. But a sudden or unexpected layoff can change that attitude in a New York minute.
How’s your property-casualty insurance coverage?
- If I own a home, have I insured it adequately? Most importantly, does that insurance coverage provide enough funds to replace my house at today’s costif it burns down?
- Whether I own a home or rent one, is my personal property insured at least to some extent against loss? Do I have a photographic collection of my most valuable personal property to document a potential insurance claim?
- Is my car properly insured and does that insurance include a decent amount of protection against lawsuits filed the other driver? Most states now require auto insurance at least to some degree. But you may need to increase liability coverage limits in certain litigious areas – like Washington, D.C. and environs, for example.
In fact, if you work as an independent professional, you may want to check with your insurance agent about obtaining additional professional “umbrella” coverage. It’s fairly inexpensive and can substantially increase your liability coverage. Financial security, particularly for independent professionals, definitely involves appropriate levels of liability coverage.
Life insurance, disability insurance and wills
- Do I have adequate life insurance, at the very least through my place of employment?
- Is my health insurance covered in some way, shape or form? (Tough one. The ongoing Obamacare mess makes this item a costly movable feast that changes annually near the end of the year.)
- Do I have any kind of short- or long-term disability insurance? (In the past, this was frequently covered by an employer. But now that every company is more cost-conscious than ever, this kind of payroll deduction-provided coverage may be diminishing as companies—and workers—scramble to pay for ballooning health insurance premiums.)
- Do I have a valid current will? If not, hop to it. In many states, the state will decide who gets your assets in the event of your death, no matter what you mighthave intended.
Today, there are numerous online resources that make writing your own simple will a snap. But it’s still probably safer to have an attorney draw up the will if you have significant assets. Whatever you do, however, make sure your will is properly executed and witnessed according to the laws of the state where you reside. Rules and regs can vary greatly from state to state.
Do you have a personal or company-provided retirement plan?
- If I’m employed by a company of reasonable size, does the company have a contributory 401(k) plan? Does the company offer an employee match?
- If not, have I set up my own regular or Roth IRA account?
You get older every day. And as you near retirement age, you don’t want to be one of the legion of Americans who suddenly realize that Social Security (if it’s still around) won’t cover their needs in retirement. That’s the main reason behind the availability of 401(k) and other personally funded retirement accounts such as personal IRAs. These amount to your backup – or even primary – retirement insurance plan.
Assuming you do participate in a 401 (k) plan with or without an employer match, you’ll want to learn as much about that plan as possible. That’s because 401(k) plans likely include stock, bond and even real estate holdings you can direct to a limited degree.
However, company plans limit each employee’s investment choices to those provided by the corporate-sponsored plan. We’ll discuss these plans in general in a future column. But bottom line, you must learn what you can expect from stocks and bonds on their own before you can expertly direct your own 401(k) account, which often allows stock investing via specific funds – not individual stocks.
Ultimately, if you’re not in any kind of retirement plan at all right now, you will seriously want to set something up, even if it hurts your entertainment cash flow. As Boomers already know, whatever one saves never seems to be adequate when it’s time to retire. 401(k)s and IRAs constitute your own personal survival insurance policies. So set up or participate in a retirement plan today.
Closing thoughts on retirement accounts
When the Great Recession crushed the U.S. economy, nearly everyone suffered financially. Boomers were in marginally better shape than other workers, if only because they’d had more time to accumulate assets before that disaster hit.
Gen Xers, Millennials and whoever comes next are likely to be in worse shape in this regard. That’s particularly true of the latter.
So participate in a 401(k) if your employer offers one. Or start your own IRA. Or both. This holds true even if you’d rather spend this week’s paycheck remains chugging session brews at your favorite local pub. A certain amount of incremental self-denial today will prove to be a real godsend tomorrow. This fast-aging columnist oughta know.
Save for retirement. Do it. Now.
Bottom line:Pay attention to all the boring taking points and advice we’ve just provided here before you begin your own investment program. Make sure you’re liquid enough to sustain a potential personal or job-related disaster scenario, like a layoff you never saw coming.
Remember: Investing involves at least some level of risk. So make sure you’ve got your fiscal back covered before you get in this game. No matter what nice things your employer tells you about how valuable you are, you’re on your own and expendable.
Only you can look out for Number 1.
Next:The (sometimes) wonderful world of common stocks.