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Surprisingly Simple: The Keys to Financial Stability

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Worldwide Invest Better Day 9/25/2012

Here at the Fool, our goal is: To help the world invest. Better.

But to be honest with you, if we peel that mission statement apart a little, I think a bigger goal might be to help people ensure their own financial stability. That way, you can focus on the more important things in life, while not worrying too much about money.

Though I will offer you access to a special free report at the end of this piece highlighting a few stocks that I've made a cornerstone of my retirement portfolio, be forewarned: There's no magic bullet or insider secret I can give you that will lead to financial security. Instead, here are three very simple steps to take that can help calm any financial anxieties you may have.

1. Live below your means
Whole volumes have been written on the emotional and spiritual turmoil that trying to keep up with the Joneses can cause. But trying to make sure that you have the next best thing, or the biggest house on the block, can also create some serious holes in your financial stability as well.

In The Millionaire Next Door, authors Thomas Stanley and William Danko painted a picture of what a paradox we've set up in this country. Oftentimes, those who appear to be wealthy are actually perilously close to financial trouble, while those who appear to live a modest life are actually in a much more financially secure position.

In fact, a large portion of millionaires in their study didn't drive Ferraris or live in high-status neighborhoods. They were more content with a different lifestyle, and ironically left the big toys for those who could barely afford to use them.

But your goal doesn't have to be to become a millionaire; just figure out how much is enough for you and your family.

And if, by chance, you've already rung up significant debt, paying off the high-interest variety first should be an absolute priority. You can read more about that here.

2. Build up a safety net
Let's face it: Try as we might to control the future, life can throw us some curve balls. Being flexible is important to navigating all of the ups and downs that you're going to encounter. As with the point above, there's an important emotional and spiritual aspect to this, but it's also important to be financially flexible.

If the worst-case financial scenario occurred, how would you and your family deal with it? Do you have enough saved up to pay off the essential bills for the next six months with no income? How about the next year?

Opinions vary on how much is necessary to keep in cash, but most professionals (and I use that term loosely) suggest anywhere between a three-month and two-year safety net. The real answer to how much needs to be saved actually comes down to what you are most comfortable with.

The key is, this money needs to be readily accessible in case of emergency, and not in the stock market -- I'll get to why in step three.

And while we're on the topic of not-so-cheery scenarios, let's talk about insurance. If the unthinkable were to happen and you were to pass away, would your spouse and kids be able to make ends meet? Though there are lots of different types of life insurance, simple term insurance usually covers the basics.

And it doesn't stop there -- getting a high-deductible car insurance policy, as well as either home or renters insurance, helps safeguard you from some of life's unexpected troubles.

3. Now you can invest
If, and only if, you've paid off your high-interest debts, saved up enough to have a safety net, and covered your insurance basics, then you're officially ready to invest. If your employer offers a match in a retirement plan, maxing out that benefit is a great place to start.

But for those who want to get more involved, there are plenty of tax-advantaged options. Personally, I don't think there's anything much better than the Roth IRA. You pay taxes on the front end, and everything you accrue over time is usable tax-free once you hit retirement.

There are lots of strategies out there for being a successful investor, but it's best to start slow and just get your feet wet at first. Our John Reeves wrote a great piece on three simple steps legendary investor Peter Lynch used to outperform the market.

And award-winning columnist Morgan Housel has shown that simply investing in an S&P 500 index fund and reinvesting the dividends can be a great strategy.

But if you'd like to take a more hands-on approach to investing, consider checking out our brand-new special free report: "3 Companies Ready to Rule Retail." This report is especially important to me, as two of the companies are core holdings which account for almost 20% of my personal portfolio. Click here to get your copy of the report today, and find out what these companies are, absolutely free!


 

Fool contributor Brian Stoffel knows that just because these steps are simple doesn't make them easy. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (3) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 19, 2012, at 8:04 PM, maiday2000 wrote:

    Not bad ideas, but I think the list put out by a few years ago (can't recall the editorialist right now) is even better advice. He said if you do these very simple things you have a 99% chance of never being poor:

    1) Finish high school

    2) Always work

    3) If you get married STAY married

    4) Don't have children out of wedlock

  • Report this Comment On September 20, 2012, at 7:04 AM, nivekluap wrote:

    I disagree with number 3. Don't wait to start investing, do it TODAY. It will help you to focus on resolving to become debt free, or at least how to work toward it. Time is as big a factor as money when it comes to investing.

    Fool on!

    KD

  • Report this Comment On September 21, 2012, at 1:57 PM, TomB546 wrote:

    Also have a bit of an issue with the repaying debt part of #1. Paying off significant debt is a very hard proposition to stick with long-term. Id say Dave Ramsey's snowball plan is a better option. No matter the rate, pay off the debt with the smallest balance first - do all your minimum payments, then this one pay all you can. When it is gone, move on to what is now your smallest debt. The excitement generated when you have paid off each debt is a psychological advantage to keep you motivated.

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