Dear Readers: I’ve been promoting the tried-and-true principles of smart money management for so many years it can be hard to come up with fresh ways to share their important message: Spend less. Save more. Diversify your portfolio as you invest for your long-term goals. As old-fashioned as this advice may sound, it remains the foundation for your future financial success.
But if you still need convincing, I invite you to listen to the wisdom of prominent behavioral economist and Nobel laureate Richard Thaler. One of my colleagues had the opportunity to sit down with professor Thaler early this year and asked him the following question: “As individuals, what lessons can we take from 2020 as we strive to build a strong future?”
We All Need an Emergency Fund
Thaler’s advice was twofold. First, if you were lucky enough to reduce your spending over the course of the past several months and you now have extra cash, this is a unique opportunity to build a financial cushion. Take enough of that money to cover a minimum of three to six months’ worth of your essential expenses and stash it in a safe and liquid account. It won’t earn much, but you can be confident it will be there if/when you need it.Don’t Be Blinded by the Stock Market Stars
If you’re one of the millions of people who jumped into the stock market for the first time last year, Thaler has a word of caution: Beware of false confidence. For months on end in 2020, the market—in particular, several leading tech companies—was burning bright. But these shooting stars may soon flame out. Making money in Zoom, Amazon, or Tesla in 2020 made investing seem deceptively easy and seductive.
