Everywhere I turn, I see tales of financial doom and gloom. The stock market is crashing! The dollar is inflating! Oil is peaking and homes are foreclosing! If you listen to the breathless media, it's 2008 all over again.
Maybe it is, and maybe it isn't. I don't know. What I do know is that I've learned from my mistakes in past meltdowns. Today I'm able to sleep well at night because whatever happens to the national economy, my personal economy is on solid ground.
You may not be able to sway economic policy in Washington, but you can build a strong personal economy by following financial fundamentals like these:
- Stash savings. Some experts say you should have enough in savings to cover six months of expenses. Some say 12 months, and others say three. The exact number doesn't matter. What matters is that if you lose your job you have enough money saved that you don't have to panic.
- Limit debt. If you use debt, use it wisely. A mortgage isn't a bad thing, and neither are student loans. A car loan is borderline, though, and borrowing to buy a television is foolish. Use debt only when needed. If you suspect financial trouble in the future, then strive to get rid of debt completely.
- Practice thrift. When the national economy is good, it's easy to be lulled into complacency. You start spending a little more here and a little more there; before long, you're a victim of "lifestyle inflation." But if you can master the art of frugality when times are fat, you'll be better able to practice it when times are lean. (One of the best ways to do this is to reduce recurring monthly expenses.)
- Invest wisely. Don't let the news lead you to make emotional decisions. Too many people sold their stocks and mutual funds at the bottom of the market in 2009, and then waited until prices had risen before buying back. Don't do that. Instead, be sure your investment portfolio matches your risk tolerance. If a volatile market makes you nervous, you probably shouldn't have all your retirement savings in stocks. Find a balance that fits your personality.
Here's one last tip: When it comes to money, it often pays to ignore financial news. When you give too much attention to national or international economic news, you can find yourself making decisions that don't make sense for your personal economy. Five years ago when the housing bubble was in full swing and credit was flowing freely, many people bought into the idea that quick profits could be made from real estate. Now many face foreclosure. That media-fueled frenzy has turned into media-fueled despair.
The national economic situation does affect our personal financial decisions to some degree. But more important than the national economy is your personal economy. Ultimately, all you can control are your personal finances.