by Sam Weaver

Created on: March 12, 2009

Do you have the recession doldrums? Has your 401K plan cratered? You want to hit a reset on you financial plan, but you don't know who to trust or what to do?

I am not a financial planner. The only financial plan that I have shepherded is my own. I have not made a killing by predicting the downturn, but I have not lost my shirt either. I am 43 years old, own my home without any mortgage. My husband and I are part-time freelance workers who feel financially secure enough to work on projects that we enjoy, and between the income on my investments and the income we generate, we live comfortably, raise our two children and always have money left over to add to our long-term savings so that as the years go by we feel more secure.

I have a few principles that I have followed and I will share them with you.

1. The goal of your investment portfolio is to protect you from an uncertain future, not to change your lifestyle.

There are two enemies of the future value of our portfolios. One is a recession like the one that we face right now. In a recession, stocks lose value and we are at risk of seeing our hard-earned money disappear. The other enemy is inflation. When inflation is bigger than our investment returns, we are losing ground even though the actual value of our portfolio is not shrinking.

To protect yourself from a recession, you need to have the majority of your money in FDIC and government backed securities.

To protect yourself from inflation, you need to have a portion of your money in stocks, because the returns from stocks will better match the inflation rate than the government securities.

My investment ratio before the recession was 80% FDIC - Government Securities and 20% SP 500 Stocks. I have let it ride through this recession because I know that my plan to survive the recession is to have most of my assets in safe investments. The losses in my stock investments are brutal, but I know that when inflation hits, I will be depending on them to maintain the worth of my portfolio.

When your balance of Stock investments is above 25%, you are trying to capitalize on a good economy to increase your net worth, instead of your savings rate. It the short run, it sounds like an easier way to create wealth, but when the economy turns south, you will suffer for it.

2. The key to financial independence is to reduce your expenses to be less than the returns on your investments, not to make riskier investments.

Sure, 5% returns on long-term government bonds are not exciting or sexy. But, they are reliable. If you take the value of your portfolio and multiply it by 5%, and the number is too small to live the way you want, you need to save more money.

All of the get rich quick books will tell you differently. They say that you can create wealth with high risk investments. And frankly, it works for some of the people some of the time. But, then a economic tsunami comes along and wipes you out.

Though, if you realize you cannot live on the savings you have, reducing your expenses is a double value. The money that you would have spent is available for you to invest. Also, by reducing the expenses associated with your lifestyle, you have reduced the amount of money you need to support yourself. This is a recession-proof solution to creating wealth.

3. Provide a valuable service or product to others.

The secret that I will share with you today is that money doesn't make you happy. What makes you happy is helping others. There are as many ways to help others as there are people on this earth. Figure out how you want to get involved and do something that makes a positive difference to others and you will find something that all the money in the world can't buy.

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