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Sep 4 2012 12:00AM

 

Question

What is the best investment during a bad recession?

Answer

The “best” investment for any time is the investment you make in your own financial well-being.

There are “Five Fundamentals of Fiscal Fitness” that are essential to maintaining strong financial health throughout your life.  If you follow these rules and make sure your investments are well-diversified, it is likely you will successfully weather any economic downturn.

  1. Save at least 10% of your income.  Begin by saving a liquid cash reserve. Achieve sufficient liquidity, direct savings – including retirement plan contributions -- toward building a balanced portfolio.
  2. Maintain adequate liquidity. Most wage earners should have 10% of their annual income in a primary cash reserve and another 20% in a secondary reserve.  Self-employed individuals should build their cash reserve to an even greater level.
  3. Maximize you retirement savings. Why? Contributions are tax deductible, earnings are tax deferred, and contributions are generally partially matched by your employer.  Plant seeds now and allow time for your garden to grow!
  4. Own the “right-sized” home. For many Americans, their home is the most significant investment they will ever make. Buy a home 2 – 2.5 times your annual income, with a mortgage of 50% or more of its value (but not more than 80%).
  5. Carry no consumer debt. Learn the difference between bad debt, good debt, and acceptable debt.  Avoid the bad, use the acceptable wisely, and take advantage of the leveraging power of good debt. Consumer debt is bad debt – it has the highest interest rates and is not tax deductible.

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