Now that I’ve answered a few questions from readers, all on the details of investing, I want to remind you all that there is more to financial planning than investing. We could talk for the rest of our lives about ways to tweak a portfolio and possibly add a little more in returns, but if you get nothing out of my investment discussion other than the importance of saving a portion of your earnings and putting it into a global diversified equity portfolio, I’d hate for you to get bogged down over whether you should invest in the Vanguard Total World Stock Fund or the iShares MSCI All Country World Minimum Volatility ETF or do a three-way split between the U.S., Developed, and Emerging Market indexes offered in your company’s 401(k). Just spend less than you earn and put the difference into things likely to go up over time and you will probably live happily ever after. Probably.
But there are two key steps in a good do-it-yourself financial plan:
- Save and invest until you’ve achieved financial independence.
- Protect yourself against financial catastrophes that could derail you before then.
I’m the first to agree that (1) is far, far more important. If you don’t save and invest, you’re pretty much sunk, while financial catastrophes big enough to wreck your life are rare enough that you’ll probably be okay even if you ignore the possibility. And some risks cannot be avoided, so you might as well ignore them.
But certain risks can be insured against at a reasonable cost, and it is a good idea to at least look at them and decide if it is worth spending a few dollars to avoid them. In the next few lessons, we will do just that. Talk to you next Friday.
P.S. Keep the questions coming to firstname.lastname@example.org. After I’ve spent a few lessons discussing one potential disaster after another, I’ll get back to the mailbag.