Eric Tyson - Financial Security For Dummies

Because money avoiders dislike dealing with money, what they’re able to save often gets ignored and languishes in low- or no-interest bank accounts. Avoiders also tend to fall prey to the worst salespeople, who push them into mediocre or poor investments with high fees. When avoiders choose their own investments, they often do so based on superficial research and analysis, which can lead to piling money into frothy investments when they’re popular. Discomfort causes avoiders to bail out when things look bleak.

Money avoiders, more often than not, lack wills and other legal documents that should specify to whom various assets shall pass and who is responsible for what (for example, administering the estate and raising minor children) in the event of their untimely demise. When money is to pass to heirs through an estate, the absence of documents can lead to major legal and family battles.

Because insurance is an admittedly dreadful and unpalatable topic for most people, many folks avoid insurance-related issues. And while well-intentioned and commission-hungry insurance agents get some people to plug insurance gaps, these salespeople may not direct you to a policy best suited to your needs. In fact, brokers may sell you costly insurance (such as cash value life insurance) that provides them with a higher commission and you with less insurance than you need.

Insurance gaps come to light when a disability or a protracted illness occurs. Too often, we believe that these problems only happen to elderly people, but they don’t. In fact, statistically, you are far more likely to miss work for an extended period of time due to a disability or lengthy illness than you are to pass away prematurely.

If others are dependent upon you financially, you likely need certain coverages that would provide for them in the event of your untimely passing. The following table shows the mortality rate for various age ranges and how the rate of course increases with age. You can see that while just 1 percent of those people between the ages of 25 and 34 pass away each decade, the portion approximately doubles with each passing decade. While 1 in 100 is a relatively small probability, it’s a much greater probability than winning your local mega-millions jackpot. Nearly 1 in every 25 people passes away during the decade between the ages of 45 and 54.

If you’re interested, you can check out the Journal of the American Medical Association’s research that shows how older people can determine a more accurate personal risk factor based upon personal characteristics: jamanetwork.com/journals/jama/fullarticle/1660374 .

Having a plan and a strategy is all well and good, until something happens that upsets that plan. And, sooner or later, something will create some, or a lot of, havoc in your life. Parts 2and 5go into more detail on how to deal with difficult situations.

From the outside, it appears that some folks lead charmed lives. But trust me when I say that everyone faces challenges and problems — and I mean everyone. I know because as a financial counselor, people have shared with me intimate details of their lives.

Notwithstanding the tendency for some folks to share details of their private lives on social media, the reality is that most folks more freely broadcast their good fortunes. Negative events like job losses, divorce, a family member with an addiction, and so on, generally, not so much!

Of course, if you earn more money and have more money saved and invested, you’ve theoretically got more room for error. But, as you may know, those people earning more often have more expenses and commitments and can lose their money fairly quickly when their circumstances change.

Economies go through cycles. Good times and periods of growth and more jobs are inevitably followed by downturns and times when more people lose their jobs or face reduced salaries.

The COVID-19 pandemic and government-mandated shutdowns in 2020 quickly threw millions of people out of work, especially in the travel, retail, and restaurant businesses. Stocks cratered and suffered one of their steepest declines in modern history. The stress level was palpable.

The 2008 financial crisis was another period where lots of people lost their jobs, and stocks and real estate prices suffered large declines in most areas. Economic problems unfolded over multiple years, and the recovery was slow.

Over the generations, there have been plenty of other economic and financial crises. I discuss those and what can be learned from them in Chapter 2.

In addition to crises in the broader economy or society, plenty of people are hit with a personal or household-specific crisis. These can include things such as:

Job loss or reduced employment income

Medical problems

Caring for an elderly relative

Divorce

Death of a spouse

I cover these in Chapter 3.

When broader economic and financial crises strike, for sure bad things happen. Some people lose their jobs. Stock prices and home values generally fall. This can create opportunities for those who have cash and courage to step up and buy otherwise good investments at depressed prices.

Having a good-size cash reserve for difficult times makes sense. But how large should that reserve be? If you keep too much in cash, your investment returns will suffer. Keeping too little in cash can cause your reserves to be pinched during tough times and can leave you with little, if anything, to invest when investment prices are down.

Most people with some cash find it hard to step up and make investments while the news is filled with so much gloom. And there’s the natural tendency to worry about things getting even worse. In Part 3, I explain how to make sense of the economic and other data to determine when it may make sense to step in.

Chapter 2

IN THIS CHAPTER

Making sense of capitalism and inevitable downturns

Surveying past crises

Gleaning insight from tough times

Many folks don’t know about or understand the range of economic and political systems that exist around the world. That’s unfortunate because if everyone better understood this, more folks would appreciate how great the capitalistic system is in the United States.

No economic system is perfect, of course, and no economic system can sustain growth forever without downturns and some problems. In this chapter, I help you to better understand our economic system and the inevitable cycles of growth and downturns, which can sometimes include more severe recessions and financial crises.