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- Herausgeber: John Wiley & Sons
- Kategorie: Ratgeber
- Sprache: Englisch
- Veröffentlichungsjahr: 2021
Boost your financial health so you're ready for any economic or personal upheaval Crisis is inevitable--but it doesn't have to torpedo your finances! Financial Security For Dummies offers proven advice to help you prep your finances for the next economic downturn, personal setback, pandemic, plague of locusts--or anything else life throws your way. This book contains the historical perspective and up-to-date info you'll need to anticipate, understand, and navigate a wide range of personal financial challenges. If your monthly income and expenses are on steady ground and you're ready to secure your financial future, this is the For Dummies guide for you. Not only will you create a plan to keep your family's finances afloat during turbulent times, but you'll also be liberated from the pressure to "keep up with the Joneses" so you can make smarter financial decisions, starting today. This book will help you: * Gain an understanding of how unforeseen personal or global events could affect your financial life * Learn strategies for protecting your assets when economic downturns and other emergencies occur * Feel confident in your unique path to financial freedom so you can remain calm when life takes an unexpected turn * Build a survival plan for protecting yourself with broader safety nets, better money decisions, and improved financial literacy Whether you want to reduce your stress surrounding your financial goals or take advantage of financial opportunities crises create, Financial Security For Dummies will equip you to navigate financial challenges and ultimately achieve peace of mind.
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Financial Security For Dummies®
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Copyright © 2022 by Eric Tyson.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey
Published simultaneously in Canada
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Library of Congress Control Number: 2021946586
ISBN 978-1-119-78078-6 (pbk); ISBN 978-1-119-78079-3 (ebk); ISBN 978-1-119-78080-9 (ebk)
Financial Security For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “Financial Security For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: Understanding Financial Security
Chapter 1: Navigating the (Bumpy) Road to Financial Independence
Reaching for Financial Security
Coping with Crises
Making Decisions Based on Changing Circumstances
Chapter 2: Understanding Capitalism and Economic Downturns
Understanding Our Economic System
Touring Past Crises: What Happened and Why
Mistakes Made … and Lessons to Carry With You
Chapter 3: Coping with Personal Crises
When a Crisis Comes Calling
Success Plans for Personal Crises and Life Changes
Part 2: Crisis Mode: Accessing Safety Nets and Emergency Measures
Chapter 4: Your Safety Nets
Taking Stock of Your Resources
Surveying Societal Safety Nets
Chapter 5: Digging Out and Forging Ahead
Turning Your Eye toward Recovery
Thinking (and Researching) Before Making Financial Moves
Leaning on an Expert for Help
Minding Your Media Intake
Part 3: Being a Smart Consumer of Economic Information
Chapter 6: So Many Numbers! Making Sense of Economic Reports
Keeping Economic Reports in Perspective
Sleuthing Through Economic Reports
Interpreting Media Coverage of Economic Data
Chapter 7: Says Who? Weighing “Experts’” Advice
Understanding Why Particular Pundits Get Attention
Uncovering Gurus’ Agendas
Deciding Whether Hiring an Advisor Is the Right Choice
Chapter 8: Following Financial Markets
Understanding Stocks and Bonds
Making Informed Investing Decisions
Challenging Financial Markets During Changing Times
Part 4: Keeping Your Personal Finance House in Order
Chapter 9: Getting on the Right Road with Spending and Saving
Getting a Handle on Your Spending
Saving: Necessary Rocket Fuel
Upping Your Income
Lowering Your Tax Bill
Ouch! Dealing with Major Medical Bills
Chapter 10: Investing Wisely and Securely
Checking Out All the Places You Can Invest Your Money
Cultivating Good Investing Habits
Developing a Personal Investing Plan
Selecting the Best Mutual Funds and Exchange-Traded Funds (ETFs)
Seizing Investment Opportunities During Tough Times
Chapter 11: Getting and Maintaining Proper Insurance
Being Prepared: A Quick Lesson on Insurance
Protecting Your Health
Securing Your Income-Earning Ability
Insurance on Your Assets
Will, Trusts, and Estate Planning
Protecting Yourself from Identity Theft and Fraud
Part 5: Prepping for Future Armageddon
Chapter 12: What Pundits Scare People About
Fearmongers Have Been Scaring Folks for Generations
Surveying the Leading Worries Being Pitched Today
Chapter 13: Preparing Yourself for Unexpected Future Crises
What Possible Future Crises Should You Be Prepared For?
Preparing Financially and Otherwise for New Future Crises
Part 6: The Part of Tens
Chapter 14: Tens Ways to Improve Your Personal Safety
Combine Your Instincts with Proven Strategies
What You Don’t Know Can Hurt You
Do Unto Others As You Would Have Others Do Unto You
Err on the Side of Caution
There’s (Some) Safety in Numbers, But There May be a Weak Link
If It Looks Too Good to Be True, It Probably Is
Don’t Assume “Lightning Never Strikes Twice”
Don’t Judge a Book by Its Cover
Trust Your Instincts
Share Your Concerns with Someone You Trust
Chapter 15: Ten Ways to Address Over-Saving
Understanding the Over-Saver Mindset
Balancing Spending and Saving
Keeping Money Accumulation in Proper Perspective
Giving Yourself Permission to Spend More
Doing Some Retirement Analysis
Getting Smart about Investing Your Money
Going On a News Diet
Treating Yourself to Something Special
Buying More Gifts for the People You Love
Going Easy When It Comes to Everyday Expenses
Index
About the Author
Advertisement Page
Connect with Dummies
End User License Agreement
List of Tables
Chapter 2
TABLE 2-1: Annual GDP Change for the United States
Chapter 11
TABLE 11-1 Chronic Conditions Affecting Activity
List of Illustrations
Chapter 6
FIGURE 6-1: A drop in GDP followed by recovery.
FIGURE 6-2: GDP trend from 1948 to present.
FIGURE 6-3: An example of a payroll survey.
FIGURE 6-4: Labor force participation rate.
FIGURE 6-5: University of Michigan Consumer Sentiment.
FIGURE 6-6: Overall versus core CPI.
Chapter 11
FIGURE 11-1: Insurance needs worksheet.
Guide
Cover
Title Page
Copyright
Table of Contents
Begin Reading
Index
About the Author
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Introduction
Welcome to Financial Security For Dummies!
I know from my work as a personal financial counselor and educator that many Americans lack a sufficient background in the financial basics. My first book in this series, Personal Finance For Dummies, sought to address and help close that gap, and the feedback from that book suggests it clearly has helped.
I’ve seen over time, though, that folks who know many of the basics can still suffer financially at important junctures and when hit by unexpected events. So, this new book, Financial Security For Dummies, is like an advanced version of or a sequel to Personal Finance For Dummies.
About This Book
Most people value financial security and stability, of course, unless they like danger, risk, and turmoil! Living within your means, saving and investing in wise, proven investments, and securing catastrophic insurance are all keys to sound personal financial management.
Unfortunately, your financial security can be undermined by things outside of your control. Upsetting events can include macro-events like the COVID-19 pandemic (2020) or financial crisis (2008) as well as individual life changes or personal crises, such as job loss, divorce, caring for elderly parents, and so on. Part 1 addresses these two major types of crises or catalysts.
You may find that at some point, you need to access funds in the event of a crisis. It should give you peace of mind to know that there are ways to get help. Part 2 looks at all crises (economic and personal) and discusses safety nets that people can tap and emergency measures they can implement.
You may be looking to navigate the barrage of information coming at you while an economic crisis is in motion. Part 3 contains content that is central to the book and vital for you to understand as you deal with turbulent times.
To maintain financial stability, you need to keep your financial house in order. Part 4 identifies the key personal finance tasks and steps to take to maximize your future financial security and minimize problems when disruptions inevitably occur.
What does the future hold? No one knows for sure, but there are ways to be prepared. Part 5 delves into discerning what pundits may be telling you about current and future economic issues and finding out how to keep yourself and your finances on track when things look gloomy. It also touches on what future crises may be in store and how to keep your cool.
Foolish Assumptions
Whenever I approach writing a book, I consider a particular audience for that book. Because of this, I must make some assumptions about who the readers are and what those readers are looking for. Here are a few assumptions I’ve made about you:
You want the best for you and yours and would like to make the most of your money. While you understand there are no guarantees, you’d like to best prepare your financial situation to weather a wide range of adverse conditions.
You’d like to gain a better understanding about how the financial markets and economy work so you can intelligently process news and information that hits, especially in the midst of a crisis.
You’d like to be positioned to be able to invest at least some of your money when otherwise attractive investments have declined in value.
If any of these descriptions hits home for you, you’ve come to the right place.
Icons Used in This Book
Throughout this book, you can find friendly and useful icons to enhance your reading pleasure and to note specific types of information. Here’s what each icon means:
This icon points out something that can save you time, headaches, money, or all of the above!
With this information, I try to direct you away from blunders and mistakes that others have made when making important personal finance and related decisions.
Here I point out potentially interesting but nonessential stuff.
Look for this icon to find real-life examples to help exemplify a point.
I use this icon to highlight when you should look into something on your own or with the assistance of a professional.
This icon flags concepts and facts that I want to ensure you remember as you make personal finance decisions.
Beyond the Book
In addition to the material in the print or e-book you’re reading right now, this product also comes with some access-anywhere info on the web. Go to www.dummies.com and type in “Financial Security For Dummies Cheat Sheet” in the search box to discover a list of pointers that can help you keep your finances safe.
Where to Go from Here
If you have the time and desire, I encourage you to read this book in its entirety. It provides you with a detailed picture of how to best ensure your financial security. But you may also choose to read selected portions. That’s one of the great things (among many) about For Dummies books. You can readily pick and choose the information you read based on your individual needs. Just scan the table of contents or index for the topics that interest you the most.
Part 1
Understanding Financial Security
IN THIS PART …
Discover what financial security means.
Understand how the economy works and learn from past historical incidents and downturns.
Be prepared to navigate unexpected crises. Life is unpredictable; find ways to weather the storm.
Chapter 1
Navigating the (Bumpy) Road to Financial Independence
IN THIS CHAPTER
Defining and reaching for financial security
Dealing with crises
Tapping opportunities during tough times
Achieving financial independence and feeling financially secure are admittedly subjective assessments. A nest egg of $200,000 may seem like a lot to some people but not to a high-income earner who is accustomed to spending $100,000+ annually.
Now, for many people the feeling of financial security isn’t simply a matter of how much money you have to your name. Numerous other factors may contribute to feeling secure financially, which I help you to understand.
In my work as a financial counselor and educator, I’ve also seen people for whom having a certain level of wealth to feel secure is a moving target. And those targets tend to keep getting bigger and bigger over time once a given lower targeted amount has been achieved.
In this overview chapter, I walk you through determining what financial security means to you, assessing where you are now, and helping you think through what you need to do to accomplish your goals. I also survey the landscape of crises, both personal and in the broader economy, which you should be prepared to handle. Finally, I discuss how to best position yourself to benefit from the inevitable opportunities that present themselves during tough economic times.
Reaching for Financial Security
A good place to begin is by defining what financial security means to you and what is and isn’t important to you. Then I help you think through and understand where you are now and what you may need to do to accomplish your goals.
Defining what you value
If saving money is a good habit, the more you save, the better, right? Well, no, not really, unless your sole goal is to amass as much money in various accounts as possible. But what if you’re not spending enough to eat a healthy diet? How about some time and money so that you can regularly rest and enjoy some recreation? What about some spending for the special people in your life?
Think about all the big decisions in your life: choosing and finding a job, a place to live, a spouse, and so on. For most people, there’s a financial component to all of these. When thinking about personal goals, nearly all of them take money to accomplish. Money is inextricably linked to the rest of your life. Making the best financial decisions starts with the big picture and the rest of your life in mind — in other words, holistically.
Suppose like many people, you are working and earning money. You’d like to save and invest some of that and not have to continue working full-time for the rest of your life. But you probably have some other competing uses for your money. These may include things like saving to buy a home or start a business, expenses for your family, a future vacation, and so forth.
Money shares some similarities with food. If you don’t have enough, you likely notice the insufficiency of your resources. Having more than enough with some reserves and extras usually provides most people with some peace of mind. Different people, though, have different views of how much extra they may want to have.
The virtue of a capitalistic economy is that within reason, if you’re willing to work hard and seek to improve yourself and your work, over time you should be able to see your money grow. The progress and advancement of technology and society generally increase the purchasing power of your money over time.
Some folks lose sight of the differences between necessities and luxuries, especially in affluent and upper-middle class communities and circles. We can always find people with bigger homes and more expensive cars who have taken more exotic vacations. The bar can continually be set higher and higher in terms of how much money we “need.”
The continual improvement of products and services, particularly those that incorporate a lot of technology, leads to more folks taking for granted how “luxurious” some of today’s choices are compared with those of the past. Consider what’s happened with personal computers and smartphones. Today, consumers buy smartphones that have many of the same functionalities and can access far more information than personal computers could a generation or two ago. And you can buy today’s smartphones for less than the cost of personal computers from a generation or two ago. Today’s smartphones are like a handheld personal computer, a phone (that can easily travel with you), and a quality camera all rolled into one!
Automobiles have far more features, especially safety features like air bags and anti-lock brakes, compared to those from a generation or two ago. Today’s cars are dramatically more fuel efficient too.
Just walk through most homes and apartments today and you’ll find all sorts of devices like microwave ovens, printers, HDTVs, washers and dryers, dishwashers, and so on, which are far better and relatively less costly than in prior generations. And in some cases, these devices didn’t exist or weren’t widespread not that many generations ago.
So, I urge you to step back and think about what it is that you value and to recognize how “luxurious” are so many of the choices and options that we have in modern American society. With many products and services, we get far more for our money than did folks a generation or two ago.
That said, we can all think of some expense categories like higher education, housing in some higher-demand cities (such as New York City and San Francisco) and portions of the healthcare industry where the rate of price increases (inflation) may exceed increases in typical wages and the general cost of living. These categories are the exception, not the rule, and you can take steps and actions to mitigate and blunt some or even much of the excessive price increases through the strategies I discuss in this book.
Especially in our consumption-oriented society, some folks may get carried away with working and earning more and amassing more money. Life is short, and you can’t take your money with you in the end. So, there’s something to be said for balancing work, earning and saving money, and having sufficient time for family, friends, and your activities and hobbies.
Assessing where you are
What’s your current personal financial health? There are numerous ways to measure that. When I’ve worked with clients as a financial counselor and as an educator, I’ve found the following exercises to be valuable:
Net worth analysis:
Your ability to accomplish important financial goals, such as buying a home and someday retiring from full-time work, depends upon your net worth. To derive your net worth, you total up your financial assets and subtract your financial liabilities. I typically exclude a person’s home in this analysis unless they plan to tap some portion of their home’s equity, by trading down to a lower-priced property.
Spending analysis:
You should know where your money goes in a typical month or year, especially if you’d like to save a greater portion of your employment income. Analyzing your historic spending can tell you just that.
Saving analysis:
Over the past year, what portion of your work income were you able to save? Many people don’t know the answer to that important question, and if you don’t, you can’t really know whether you’re on track to accomplish your financial and personal goals.
Your investment portfolio:
Can your investment portfolio be improved? Do you understand your current investments? How do your current holdings stack up in terms of costs/fees and performance within their respective peer groups? Do your current investment holdings match your risk and return preferences?
Your home:
If you currently rent or own a home but are looking to sell and buy another, that takes some advance planning and analysis. Since housing costs can consume a significant portion of your income and budget, you should ensure that a change in your housing situation fits with your financial and personal goals and planning.
Insurance review:
You should have insurance to protect you against losses that could be financially catastrophic to you and your loved ones. I know from my counseling work that many folks have gaps in their insurance coverage and are wasting money on overpriced or unnecessary policy features.
Employee benefits review:
Plenty of employees don’t bother to read and review their employee benefits, which typically include various insurance coverages and possibly a retirement savings plan. Employee benefits can actually be quite valuable and should be coordinated with your overall financial plan.
These elements form a personal financial plan. You can hire a competent and ethical financial planner to assemble such a plan for you, but you should beware that many folks sell products on commission or charge hefty ongoing money management fees. Others aren’t interested or experienced enough to help you with nuts-and-bolts issues like analyzing your spending. See Part 4 for more details on getting your personal finance house in order.
Grasping financial lingo and trends
Personal financial knowledge and literacy is an enormous obstacle for too many people, including those who have invested tremendous time, energy, and money into their formal educations. Unfortunately, such education rarely includes the vital topic of personal finance.
Ubiquitous gurus are another common obstacle. Everywhere you look, especially online and in the media, there are plenty of anointed experts predicting what will supposedly happen with the economy, financial markets, and all sorts of other economic variables. Listening to all these supposed experts and their often-conflicting opinions can paralyze you or make you feel that you need to hire them (or others like them) to manage your money since it appears that they know so much more than you do.
In reality, it’s important that you develop a personal financial plan of action that suits your goals, needs, and concerns and doesn’t involve jumping into and out of investments based upon short-term noise or news events.
Trying not to avoid money
One big obstacle is that just about everybody avoids dealing with some aspect of money. For some, it’s as simple as avoiding looking regularly at their checking account and verifying transactions and the account balance or making decisions about where to invest saved money. Others neglect needed insurance coverage, perhaps out of fear of confronting their own mortality and vulnerabilities. Some people are plagued by broader problems such as feelings of guilt and shame about money or feeling that money seems dirty and evil.
The fact that money-related issues aren’t always at the top of your priority list may well be a good sign. Perhaps you spent the past weekend with friends and family or were engrossed in a captivating book or newly discovered streaming series. But continually avoiding money or some aspect of your finances can result in unnecessary long-term pain.
Some personal finance procrastinators can get away with their ways for a number of years. However, whether it’s in the short term or the long term, eventually, problems do occur from avoiding dealing with money and related decisions, and sometimes the damage can be catastrophic.
Some money avoiders don’t plan ahead and save toward future goals. Often, the reality hits home when they contact the Social Security Administration (SSA) or get an update from the SSA and discover what monthly retirement benefit amount they’ll get at full retirement age (which is around age 66 to 67 for most people). The reality for many people means the realization that they’ll have to continue working into their seventies in order to maintain the modest standard of living to which they’ve become accustomed.
Several issues typically cause a lack of retirement funds. Many money avoiders could save more money, but they typically aren’t motivated and organized enough to do so. Generally, they haven’t bothered to conduct even basic retirement analysis to understand how much they should be saving to reach their retirement goal (or even think about if and when they want to retire).
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.
Making use of insurance: A necessary evil
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.
Age
Percent of People Passing Away (During Decade)
25–34
1.0%
35–44
2.0%
45–54
4.3%
55–64
9.6%
65–74
23.5%
75–84
55.8%
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.
Coping with Crises
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 2 and 5 go into more detail on how to deal with difficult situations.
Everyone faces challenges, obstacles, and setbacks
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.
Common crisis
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.
Making Decisions Based on Changing Circumstances
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
Understanding Capitalism and Economic Downturns
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.
In fact, I’m going to take you on a tour of some of the worst economic periods and crises during our nation’s history. Rest assured that I’m not trying to scare you or inhibit your desire to invest in stocks, real estate, or other growth assets. I’m actually taking this approach to maximize your ability and determination to stay the course during tough times and possibly even deploy available resources to buy/invest when prices are down.
Understanding Our Economic System
The United States has altered the course of human history, in a positive way, far more than would be expected considering the relatively short period of human history during which it has existed. No, it hasn’t had a perfect record, but at least it has literally torn itself apart (the Civil War) and put itself back together again trying to right its own wrongs.
The post-Civil War United States has used its power to secure more freedom and prosperity for more people than ever in the history of the world, making it possible for them to pursue and achieve the fullness of their human potential. That’s why people from all over the world want to come to and live in America.
In this section, I discuss the achievements and strengths of the U.S.’s capitalistic system as well as some concerns that have been raised about it.
Capitalism strengths and criticism
The original 13 American colonies are a good illustration of the origins of governments and economies. The leaders of the individual colonies elected to federate — to enter into a contract to coexist as one nation — in substantial part to provide for their common defense, but defense wasn’t the only reason they federated. They federated also because they knew that each individual colony would be far more likely to survive and succeed if they cooperated, not only in their mutual defense, but also with regards to infrastructure, such as making it possible for their citizens, goods, and mail to travel easily between them and making it easy to transact trade using a common currency.
Since its inception, the United States of America has afforded its citizens the best environment in the history of humankind in which to achieve the fullness of their human potential. This requires high degrees of both personal and economic freedom, and the United States provides these through a democratic government, with strong protections for individuals, and through capitalism, which promotes competition between individuals and rewards the development of unique potential.
There's no way for any society to guarantee that every member's every need will be met every day. Capitalism is, far and away, the best way to guarantee the highest standard of living to the greatest number of people within a society. Capitalism accomplishes this by
Empowering the vast majority of its members to be at least productive enough to meet their (and their dependents’) subsistence needs
Empowering many members to be productive enough not only to meet subsistence needs but also to compassionately contribute to meeting the subsistence needs of the relatively few truly incapable members.
Consider that the United States, in just a couple of centuries, surpassed the standards of living of every other nation on Earth, including nations that had existed for hundreds, even thousands, of years prior. Capitalism did that.
Any other nation in human history that has achieved power comparable to that of the United States in today’s world — a lone “superpower” — has used that power to take freedom away from people, to conquer, and thereby to stifle the development of unique human potential. For most of human history in fact, most human beings have lived in conditions wherein whoever was physically stronger (individually or collectively) largely determined how much of their potential the collectively weaker groups/societies could develop.
Comparing socialism to capitalism
Just about anyone who was raised in America doesn’t know how bad it can get economically in other systems because they simply haven’t experienced them. When it comes to quality of life for folks near the top, the middle, and near the bottom, capitalism is the best economic system.
That’s not anywhere near the case in countries like Greece that embrace socialism. Greece has the level of government involvement, federal programs, and widespread labor unions that progressives/socialists constantly argue for, and that is precisely what drove the country into default and wrecked their economy.
As recently as 2013, Greece’s unemployment rate hit a whopping 27.9 percent and was still more than 15 percent in mid-2021. Think about what a train wreck of an economy that is. And their stock market has been even uglier. From its peak in 1999, the Athens Stock Exchange General Index is still down more than 86 percent as of mid-2021.
Younger Americans, however, have come to believe that socialism is as good as or better than capitalism. According to Gallup,
“Since 2010, young adults’ positive ratings of socialism have hovered near 50 percent, while the rate has been consistently near 34 percent for Gen Xers and near 30 percent for baby boomers/traditionalists. At the same time, since 2010, young adults’ overall opinion of capitalism has deteriorated to the point that capitalism and socialism are tied in popularity among this age group. This pattern was first observed in 2018 and remains the case today.”
The more a person understands how the economy and financial markets work, the more likely they are to identify with and support free-market capitalism with a minimal role for government. I firmly believe, based upon many years now of observation and business world experience, that the increasing numbers of socialist-loving (and capitalist-hating) young adults in America are economically illiterate.
Understanding wealth and income inequality
Over recent years, there has been more and more discussion about the unequal distribution of income and wealth in America. Self-declared Socialist Senator Bernie Sanders (Vermont) has made income and wealth inequality a focal point of his efforts.
In a speech that Sanders delivered at Liberty University, he said:
“In the United States of America today, there is massive injustice in terms of income and wealth inequality. Injustice is rampant. We live, and I hope all of you know this, in the wealthiest country in the history of the world. But most Americans don’t know that. Because almost all of that wealth and income is going to the top 1 percent …
“… we are living in a time where a handful of people have wealth beyond comprehension. And I'm talking about tens of billions of dollars, enough to support their families for thousands of years. With huge yachts, and jet planes, and tens of billions. More money than they would ever know what to do with. But at that very same moment, there are millions of people in our country, let alone the rest of the world, who are struggling to feed their families. They are struggling to put a roof over their heads, and some of them are sleeping out on the streets. They are struggling to find money in order to go to a doctor when they are sick …
“And while the very, very rich become much richer, millions of families have no savings at all. Nothing in the bank. And they worry every single day that if their car breaks down, they cannot get to work, and if they cannot get to work, they lose their jobs. And if they lose their jobs, they do not feed their family. In the last two years, 15 people saw a $170 billion increase in their wealth; 45 million Americans live in poverty. That in my view is not justice. That is a rigged economy, designed by the wealthiest people in this country to benefit the wealthiest people in this country at the expense of everybody else.”
Senator Sanders has held such views throughout his more than four decades of being a Vermont-based politician. He is severely misguided, most likely because he doesn’t fundamentally understand how the U.S. economy and the private sector work. Sanders has never worked in the private sector nor done anything besides politics.
Here are my thoughts and responses to the points he makes in his speech:
The “top” 1, 10, or 20 percent is not a fixed group of individuals. The notion that income keeps flowing and wealth is accumulating the most for a fixed group of individuals is simply wrong. Think about people you know (perhaps including yourself) who earned varying amounts of money at various points in their lives. Consider pro athletes who, if they “really make it,” can earn millions per year. However, before that happens, they can endure many years of low and unremarkable wages. And the few who end up earning large sums only do so for a limited number of years. This pattern happens in other industries.
Flawed income and wealth disparity measures don’t take into account government money transfers. Income disparity measures fail to count government programs such as food stamps and Medicaid and the value of those benefits to individuals and households. The same is true for monthly Social Security benefits, pensions, and so on. Earned but not yet tapped monthly benefits can easily be worth hundreds of thousands to millions of dollars, yet these earned benefits are ignored in measures of supposed income and wealth disparity.
Sanders fails to mention unequal distribution of taxes paid. According to the Tax Foundation, the top 1 percent of income earners earned 21 percent of all income and paid a whopping 39 percent of all individual income taxes. By contrast, the bottom 50 percent of income earners paid just 3 percent of federal income taxes. No federal income tax at all is paid by 45 percent of all Americans.
Sanders completely omits any discussion of donations, especially those given by the super wealthy. Studies of wealth inequality ignore the fact that the wealthy, and especially the very wealthy, donate large portions of their wealth to charities. Sanders is correct that some Americans have tens of billions of dollars — far more money than they and their families could ever use. But these same super wealthy people give away large amounts of their wealth. So, much of the wealthiest folks’ assets end up benefiting and helping those at the lower end of the wealth and income spectrum.
Wealthy folks who don’t give away their assets during their lifetimes get whacked with hefty estate taxes. Under current federal law, only $11.7 million can be passed to heirs free of estate tax, and amounts above this are taxed at about 40 percent. Also, the wealthy are greatly limited on how much they can give away during their lifetimes to family; they’re limited to $15,000 per person per year.
It’s absurd and inaccurate to say that the economy is designed and rigged by the wealthiest to benefit themselves. In a free-market capitalist economy, small-business owners and entrepreneurs and employees at successful companies have the opportunity for upward mobility. What actually stands in the way of this economic freedom are too many laws and regulations that unequally burden small companies. Larger companies have the staff and resources to comply with such government-imposed rules more easily.
Calls for high minimum wages harm the very people such laws were supposedly designed to help. To redress income inequality, Sanders, among others, advocates a much higher minimum wage. Sanders has long sought a $15 minimum wage, which is about double the current level in many states and the federal minimum wage. However, local governments that have significantly increased the minimum wage have (not surprisingly) discovered that it creates more unemployment among entry-level workers. This makes sense because it gives businesses even more incentive to automate and minimize the number of workers.
On April 27, 2021, President Biden imposed a $15 minimum wage by Executive Order for federal contractors. The order requires federal agencies to incorporate a $15 minimum wage in all contract solicitations starting January 30, 2022. Agencies will have to implement the higher wage in new contracts by March 30, 2022.
Globalization increases the opportunity for companies and the wealth they can capture because of the bigger markets for their goods. So the entrepreneurs and shareholders of such companies share in the upside of these firms. The stock market allows investors of all economic means to share in the growth and upside of companies.
Fostering an environment that encourages business is the best way to create more and better-paying jobs. Competition for workers and a shortage of workers drives up wages! Misguided socialist policies would stifle and penalize creativity and investment, and corporations would flee the United States.
History of growth and downturns
Over the long term, the U.S. economy has averaged approximately 3 percent annualized real (after inflation) growth. This rate of growth has slowed to closer to 2 percent annually on average in more recent decades.
This long-term track record for growth in the U.S. economy has been great news for workers, as it has helped to keep the historic unemployment rate low. And the purchasing power of workers’ wages has increased over the decades and generations. Consider for a moment how many people have smartphones today, which are more powerful and a fraction of the cost of the first generations of personal computers.
Furthermore, the long-term growth of the U.S. economy helps to explain the terrific long-term returns from U.S. stocks. Over the past two-plus centuries, U.S. stocks have averaged annualized returns of about 9 percent, or about 6 to 7 percent after inflation.
Now, the 2 to 3 percent annualized real (after inflation) growth rate of the U.S. economy should not be interpreted to mean that the U.S. economy grows every year and at a reasonably steady rate because it doesn’t! That’s the long-term average annual growth rate, which includes some down periods — when the economy is actually shrinking — and includes some faster growth periods, which typically happen coming out of an economic downturn. See Table 2-1 for the year-by-year growth rates of the U.S. economy since 1970.
TABLE 2-1: Annual GDP Change for the United States
Date
GDP Growth (%)
2020
–3.5%
2019
2.2%
2018
3.0%
2017
2.3%
2016
1.7%
2015
3.1%
2014
2.5%
2013
1.8%
2012
2.2%
2011
1.6%
2010
2.6%
2009
–2.5%
2008
–0.1%
2007
1.9%
2006
2.9%
2005
3.5%
2004
3.8%
2003
2.9%
2002
1.7%
2001
1.0%
2000
4.1%
1999
4.8%
1998
4.5%
1997
4.4%
1996
3.8%
1995
2.7%
1994
4.0%
1993
2.8%
1992
3.5%
1991
–0.1%
1990
1.9%
1989
3.7%
1988
4.2%
1987
3.5%
1986
3.5%
1985
4.2%
1984
7.2%
1983
4.6%
1982
–1.8%
1981
2.5%
1980
–0.3%
1979
3.2%
1978
5.5%
1977
4.6%
1976
5.4%
1975
–0.2%
1974
–0.5%
1973
5.6%
1972
5.3%
1971
3.3%
1970
0.2%
The National Bureau of Economic Research (NBER), a private nonprofit research organization which came into existence in 1920, has documented U.S. economic activity back to 1802. Through 2021, the NBER data show that the United States has experienced 48 recessions — or about one per five years.
While their definition is a bit more complicated, a recession is generally defined by two consecutive quarters of declining real gross domestic output. (NBER uses a more detailed definition, which looks for a decline in employment, industrial production, real personal income, real manufacturing, and trade sales.)
Touring Past Crises: What Happened and Why
When a major crisis hits — for example, the 2008 financial crisis, the 2020 COVID-19 pandemic, the 2001 terrorist attacks, and prolonged recession — unexpected things happen. And if you’re one of the millions of people adversely affected, stress and emotions can add to the financial quandaries and problems you face. Each crisis is unique and impacts the economy and individuals personally in differing ways.
Past experience and the “school of hard knocks” can certainly improve how well you react to each such event. But you can prepare for and better manage through especially challenging times by examining such past episodes.
Why pilot training has relevance for your tour …
What I’m suggesting is a similar type of training that commercial airline pilots go through on flight simulators. Consider that you wouldn’t want a pilot encountering an unusual event (for example, dual engine failure requiring a water landing) for the first time in a real flight with hundreds of passengers on board a jumbo jet! All those US Airways passengers onboard Captain Sullenberger’s jet were grateful that he and his copilot had extensive training and knew what possible options to quickly consider when their plane’s twin engines shut down after striking a flock of geese soon after takeoff from LaGuardia Airport in New York City.
This book aims to provide you with the training and historic perspective so that you are well prepared to deal with and navigate a wide range of personal financial challenges. When an unexpected crisis occurs, our biological wiring causes our fear reaction to kick in, which can cause more problems.
Keeping calm and keeping perspective are vital. Knowing how prior crises have unfolded and gotten resolved can help. Also, there are opportunities to benefit from lower prices on investments like stocks, real estate, and small business at such times, but many people aren’t financially or emotionally positioned to do so.
When a crisis unfolds, I don’t need to tell you that it’s “breaking news.” Nearly everyone consumes some news and media coverage, whether through traditional outlets (such as radio and television) or through newer platforms (such as social media, blogs, podcasts, and so forth). I can tell you from thousands of personal observations that the economic coverage and biases of those outlets can and will get in the way of you making the best personal financial decisions. And so too can your own biases and beliefs, especially if you follow politics and identify reasonably strongly with candidates from a particular political party or ideology.
The Panic of 1907
You probably didn’t know or realize it at the time, but the 2008 financial crisis actually shared numerous parallels with the so-called Panic of 1907. And, the 1907 panic was similar to other financial panics, bank runs, and bank failures that came before it. Such episodes were reasonably common as the government-operated Federal Deposit Insurance Corporation (FDIC) insurance system for banks didn’t come into existence until 1933. There was also no other federal oversight or backstop for banks, like the Federal Reserve, which didn’t exist in 1907 (but came out of this crisis).
According to a Federal Reserve Bank of Boston review of the Panic of 1907 and other panics:
“Some were more severe than others, but most followed the same general pattern. The misfortunes of a prominent speculator would undermine public confidence in the financial system. Panic-stricken investors would then scramble to cut their losses. And because it wasn’t uncommon for speculators to double as bank officials, worried depositors would rush to withdraw their money from any bank associated with a troubled speculator. If a beleaguered bank couldn’t meet its depositors’ demands for cash, panic would quickly spread to other banks … many Americans suffered sudden and dramatic reversals of fortune when a panic struck. Even in a relatively mild panic, fortunes evaporated, and lives ended in ruin.”
In 1907, numerous important countries in the world’s economy had a banking crisis. Problems began in the United States. and then spread to Denmark, France, Italy, Japan, Sweden, Chile, and Mexico. Some trust companies, which were quasi-banking institutions that had reserves on hand of only 5 percent of their obligations, became insolvent when their lending to copper companies led to losses when copper prices dropped.
In April 1906, the great San Francisco earthquake squeezed insurers and caused them to liquidate large portions of their financial holdings — stocks and bonds. Also in 1906, the Interstate Commerce Commission, which was the first U.S. regulatory agency (created in 1887), began price regulations on the economically important railroads. That and the resulting collapse in railroad stock prices contributed to the financial crisis.
U.S. stock prices got hammered, dropping by nearly half (49 percent) during this tumultuous economic two-year period from early 1906 to late 1907. Trust company and bank failures continued until banker John Pierpont Morgan (whose firm today is known as J.P. Morgan) put up his own money and enlisted other prominent New York bankers to do the same. The need for a banker of “last resort” led to the creation of the Federal Reserve System and their fulfilling that need (when properly engaged) during future such events. However, the Federal Reserve made some major mistakes during the Great Depression (discussed in the next section), so the Federal Reserve was very much a work in progress in the aftermath of its creation following the Panic of 1907.
Stock prices fully recovered from the 1906–1907 period decline by mid-1909. It’s also worth noting that although the words “panic” and “crisis” are used to describe the economy and stock market of this period, the rate of the stock market decline was typical for a bear market. While the 49 percent stock market decline was among the larger bear markets, it played out over 22 months so there was really no “panic,” and the rate of decline was about 2.2 percent a month on average over the entire period.
The Great Depression
The economic calamity that lasted a full decade (most of the 1930s) is known as the Great Depression. It was characterized by high unemployment, falling prices (deflation), collapsing stock prices, and mostly inept and wrong government responses.
The stock market crash of this period happened globally. The price declines actually began in Europe in 1928 the year before the U.S. stock market peaked in late 1929. Most European stock markets were down by about 15 percent by the time the U.S. market was peaking. From its peak in 1929 to the bottom in 1932, the U.S. stock market dropped a bone-rattling 89 percent.
The roaring ’20s that preceded the Great Depression was a decade of a strong and expanding economy. U.S. stock prices advanced nearly 500 percent, marking the greatest bull market in U.S. market history, from their 1921 lows to their late 1929 peak. Over this period, the Dow Jones Industrial Average advanced from about 64 to 381.
Many factors led to the economic and financial market disaster known as the Great Depression:
The record run in stock prices was fueled in part by easy credit conditions for buying stock with borrowed money — known as
margin loans.
Investors were able to buy stock by putting up only 10 percent of the cost via their own money and borrowing up to 90 percent. Having just a 10 percent equity stake left little margin for a big decline in stock prices, which led to
margin calls
— forced selling of stock holdings which accelerated the decline once started.
The Federal Reserve raised interest rates in 1928–1929 to curb speculation in the financial markets. “This action slowed economic activity in the United States. Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed’s actions triggered recessions in nations around the globe,” according to the St. Louis Federal Reserve. To rein in speculative buying of stocks, the Fed should have raised the stock margin purchase requirement from its low level of 10 percent (note that today it is at 50 percent).
The Smoot-Hawley Tariff Act passed by Congress and signed into law in 1930 led to a trade war which depressed global trade. The United States slapped 20 percent tariffs on imports to the United States, which set off retaliatory tariffs by many other countries.
Economic problems and falling stock prices led to depressed consumer confidence and a run on banks. The Federal Reserve failed to step in and act as the lender of last resort, and the resulting bank failures contributed to the further downward economic spiral.
The Federal Reserve allowed the nation’s money supply to drop 30 percent, which led to an equivalent, deflationary price decline. With all of the previously mentioned economic problems, the Fed added to the misery by allowing the nation’s money supply to shrink 30 percent from 1930 to 1933, which led to an approximate 30 percent deflationary decline in prices. This deflation had the impact of increasing the burden of debt among those who owed money and further harmed the overall economy.
In addition to the stock market being crushed, the unemployment rate in the United States stayed above 10 percent for more than a decade — from 1931 through 1941. In fact, it hit a high of 25 percent in 1933 and was above 20 percent for four straight years around that time.
