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On Finance: Financial Strength and Stability
Why are some people able to handle serious financial difficulties with minimal stress while other people are pushed into complete financial failure while experiencing a relatively minor financial set-back? The answers lie in just a few critical aspects of their financial picture: Core Assets, Insurance, and Debt. The balance of these three items will determine how well someone can weather a financial storm.
Core Assets:
The foundation of financial stability resides in a person’s core assets. These include cash, savings, liquid investments, and equity in marketable assets (such as a house). These items represent the amount of reserves the individual can draw on when needed. The more reserves you have to draw from the more financial turbulence you can handle.
Insurance:
Various types of insurance help individuals manage and adjust to critical negative events in their lives. Different types of insurance stabilize different aspects of one’s financial life. Health insurance helps manage the high costs associated with serious health related issues. Disability insurance helps protect against loss of income. Life insurance helps protect against loss of the wage earner’s income and increased expenses associated with a death. Car and House insurance protect the value of critical assets while also protecting against liability costs. Other insurance options are available to manage other aspects of one’s financial risks.
Debt:
A debt is defined as a liability. In turn, a liability is defined as 1) the state of being legally obliged and responsible 2) indebtedness: an obligation to pay money to another party 3) the quality of being something that holds you back.
While all three are accurate for our purposes, definition #3 is particularly poignant when considering financial stability. Debt is perhaps the most critical aspect of one’s financial situation which determine how quickly financial collapse happens. Once accepted, debt can not be easily reduced or managed. Payment or credit irregularities caused by difficult financial situations can quickly trigger punitive penalties and changes in terms which significantly add to the financial crisis. This often starts the downward spiral which is outside of the control of the individual.
Balance Provides Stability:
Putting together a solid balance of assets, insurance, and minimizing high-risk debt is critical to preparing yourself for difficult financial times. That doesn’t mean life will be easy, just that the finances will become less of a stressor during other difficult periods and events in your life.
Building a balance isn’t easy. It requires a focus on the future instead of the present. I find that those most likely to accomplish building such a foundation are those which take comfort, pleasure, and enjoyment from building for the future. It isn’t a sacrifice for them, it is an important part of their approach to life. They study and watch finances, investments, and the overall economy. They enjoy doing so, sometimes taking on these tasks as someone might approach a hobby. It generally doesn’t consume them, or great portions of their time, but they are aware and proactive in managing their own money and investments.
Posted by Paul Gernhardt on Sunday, December 28, 2008