My Point of View
Eight Keys to Financial Security
Pay yourself first. Protect your loved ones. Borrow sparingly. And don't go for the home run.
By Knight Kiplinger, Editor in Chief, Kiplinger publications
December 2008
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Author's note: Over many years of publishing Kiplinger's magazine, my colleagues and I have built up a deep institutional memory of personal-finance wisdom, and I'd like to share some of it with you. The advice below first appeared in the 50th anniversary of the magazine in 1997, and, in a lightly revised form, again in 2002. I hope it helps you in today's difficult times.
Key 1: Invest in yourself
Your own earning power -- rooted in your education and job skills -- is the most valuable asset you'll ever own, and it can't be wiped out in a market crash. Keep your earning power growing through continuous education, training and personal development. If you work in a field prone to periodic layoffs or falling earnings, think about a career change, especially if there's something else you've always dreamed of doing.
Consider this: A $30,000 pay hike can be viewed as an annual return on a capital investment, like earning a continuous yield of 6% on $500,000 of savings. You know how hard it is to save up $500,000. Maybe that $30,000 boost in salary is easier to achieve.
Key 2: Protect yourself and your loved ones
Before you acquire any financial assets, make sure you have enough insurance against life's big risks -- serious illness, disability and early death. Most people, young families in particular, are woefully underinsured, especially for disability. When an emergency arises, you and your family will never regret having "wasted" all those annual premiums on insurance you "don't need."
Key 3: Borrow sparingly
Use credit only to purchase things of lasting value: a home, education, maybe a car. Pay cash for everything else such as clothing, travel, entertainment and furniture. Even better, take advantage of the credit card company's free 30-day loan by charging responsibly and paying off the bill in full every month. Do you know anyone who got into big financial trouble because they didn't borrow enough money? I don't.
Key 4: Pay yourself first
If you feel you never have any money "left over" for investing after you pay all your bills, try reversing the bill-paying process. Make the first check you write each month a deposit to your mutual fund, money market or brokerage account. Then pay all your regular monthly bills, finishing up with the credit card bill. If you're having trouble paying that last bill, trim your discretionary spending -- but keep paying yourself first.
Key 5: Don't go for the home run
In investing, as in baseball, those who swing for the fences do hit the occasional home run. But they strike out a lot too, and their lifetime batting average -- average annual total return -- suffers accordingly. So shy away from highly volatile stocks, Initial Public Offerings (IPOs), buying on margin and commodity trading. Don't try to time markets, because no one does it consistently well. Use dollar-cost averaging to invest regularly in markets good, bad and lackluster. Have the patience to wait out the occasional (and inevitable) bear markets.
Key 6: Diversify, diversify, diversify
When tech stocks were flying high in the late '90s, safer investments like bonds, CDs and less-volatile blue-chip stocks were derided as sissy stuff. Diversification was considered boring. But successful investors have always known that any one class of assets -- stocks, real estate, bonds, cash -- will have its day in the doghouse and its day in the sun. That's why you've got to own all of them, in a mix that's right for your age, income, family responsibilities and tolerance for risk.
Key 7: Live simply today for a more comfortable tomorrow
Deferred gratification is no fun, but it's the only way I know to fund your long-term goals -- college for your kids or grandkids, that vacation home you've always wanted, early retirement, a generous bequest to your alma mater. Take a close look at your current lifestyle, and if you see a lot of spending that is dispensable, consider it found money for the bigger dreams in your life (see The Invisible Rich).
Key 8: Give generously to create a better world
Your own financial security depends far more than you may think on the financial, physical and spiritual health of others in your community, our nation, our world. When you share your good fortune by donating your money, time and talent to charity, you help create a stronger economy and a healthier, safer world.
So give generously to education, your church, social-service agencies, the arts, medical research -- whatever you value most. It feels wonderful, it's the ultimate in enlightened self-interest and it's the right thing to do (see Philanthropy Made Easy).
Knight Kiplinger is the editor in chief of Kiplinger's Personal Finance magazine,
The Kiplinger Letter and Kiplinger.com.
Reader Comments (5)
Posted by: Robert Karen at 01/01/2010 12:48:56 PM
You're getting better Kiplinger, but still have a way to go if you want to be considered a credibile news source for finanical information. You really need to stay away from the sensational headlines you've been famous for that do nothing to add to the consumers financial bottom line....You might believe it attracts wider readership, but in the end you really hurt the poor smuck who has a geninue need for the truth, wants to trust your mag , but's being let down. I never subscribed to your publication...and can't recount the number of times that your articles have been so dead wrong. Do your self a favor and quit chasing ratings by exagerated statements, and stick to the truth...
Posted by: R Fujii at 01/02/2010 01:46:07 PM
As a retiree as of 2006, I find point 7 of interest. For sure, live simply. If one likes to live for the sake of image, for keeping up with the Jonse's, it will have long term consequences when based on debt spending. Now retired I find that I could spend more, latest do dads and HD big screen items. What do I have?: 93 Subaru Loyale purchased new, 98 Ford Taurus purchased used, large screen TV from Goodwill for $24, a Sony component system for $20 - also Goodwill. All this goes to say that when one has been really diligent about saving for the big R one does not become a spendthrift even when funds are available. Frugality, if retirement prep is done properly, permeates your ENTIRE being. Any money outlay needs a care. To keep it you have to know exactly where it is going and how much is involved. RETIREMENT PLANNING IS A SURVIVAL SKILL! A proper attitude and resultant actions requried is no joke. Survival of the fittest in the urban jungle exists! I must comment on Madoff types. To me this is a creature in the money jungle willing to kill off anything that got in his way to what he saw as survival - at a very high/extravagent level. When eithic be damned is the mission statement, it has the seeds of its own destruction.
Posted by: Renata at 01/02/2010 10:12:25 PM
I like the above article. There's just one problem with all the financial magazines and articles trying to give financial advice: they are written for people who earn more then a low income earner. When I was a single mom and worked as a breakfast/lunch waitress, I could not save any money. I trimmed all my discretionary spending just to be able to pay rent, childcare, food, clothes, car payment(can't move around without a car here) and car insurance and gas. I did not go to movies, concerts or shows,I did not eat out, I did not buy any fancy clothes. So whenever I started reading any articles with financial advice, I got put off and frustrated easily because there was nothing for me in those articles.
Posted by: Frank Hefferen at 01/03/2010 08:39:31 AM
Renata is right, there are a lot of families in this country that have a gross income less than $40K. This article, and most others, aren't of much practical use to that demographic. For low and middle low income families, budgeting often means choosing between so called necessities. To get that good health insurance you recommend may mean putting the weekly groceries on the credit card or not making contributions to a retirement account. It's easy for someone making six figures to say "pay yourself first" but there is another world out there where paying for food, electricity, and mortgage are absolutely first priority and things like retirement, insurance, and charity become discretionary out of necessity.
Posted by: ReneQ at 01/05/2010 10:38:04 AM
Robert Karen is right about Kiplinger frequently venturing off the turf of safe investing... For Frank and Renata, I too have worked at the front desk of a hotel for 4 years (28/k per yr). But I was going to school part time on loans and I learned all the functions of hospitality. I soon transferred to I.T. where I eventually worked myself into management and progressively higher pay. An education, even from the local library, cannot be underestimated. The key is to get educated, live within your means and prepare for the future. I think this is possibly the best article from Kiplinger I've ever read.