Any financial planning process begins with a change in financial behavior and expectations. The degree of change varies based on financial priorities, but in the end, it’s about adopting new habits and abandoning others.

Before you take any of the following steps, it makes sense to talk to an expert who can help you see your whole financial picture. A CERTIFIED FINANCIAL PLANNER™ professional can examine all your sources of income and expenses and find the most efficient ways to cut expenses, pay off debt and boost the money you have for saving and investing.

In the meantime, here are some ideas:

Refinance if you can: Mortgage rates are still at historically low levels. You’ll need at least 10 percent equity (20% of equity will save you the PMI insurance cost) in your home and a credit score exceeding 720 to qualify for the best rates, but start negotiating with your current lender first and see how well you do.

Track your spending for a week: Either on paper or on the computer, write down every dollar you spend in the average week (and cut off credit card use during that week). At the end of that week, start marking out non-essential items just to see how much you could live without. Start with coffee and restaurant or carryout meals and work backward from there.

Make a budget: Once you’ve established how your income covers the essential expenses you must plan for, and a few inexpensive treats that should stay in, build a budget that includes specific amounts you can allocate toward debt. Keep a running total of your spending going forward, and revisit how that budget is working on a monthly basis until you start to see some positive results, and then you can review the performance of that budget a little less frequently.

Reset your entertainment expectations: Find ways to save money with friends – cook more meals at home or rent a movie instead of going out to see one. Also, get used to checking entertainment listings for free events that interest you.

If you can do it safely, take over home and auto maintenance yourself: The do-it-yourself movement is in a new phase with the economic downturn. For any home or auto maintenance chores you may have during the year, learn as much as you can about those tasks and estimate the cost of materials and your time before doing them yourself. Previous generations made do-it-yourself a necessity. See if that option is right for you and you might save considerable money doing it. Also, for bigger jobs, pair up with friends and family and you can help each other save money.

Set a new gift policy with your adult friends and family: Does everyone on your gift list over the age of 21 really need a present for birthdays and major holidays? Suggest to family and friends to have a gift drawing, a budget limit, a moratorium on gifts, or some other alternative where you trade off gifts for quality time. Even though the holidays are a few months away, it’s not too early to think about reining in the traditional holiday overspending.

Go debit: Debit cards wearing a bankcard logo are typically welcome at most stores where credit cards are accepted. This way, you pay cash without carrying cash. If you don’t have such a card, you can get one from your bank to replace your traditional ATM card, but remember to tell them to limit your buying power on the card to only what you have in your account. And use the overdraft protection to avoid fees.

Revamp your shopping list: Give this a shot: start a central weekly shopping list on a single piece of paper and add a dollar value for each. Write everything you think you need to buy on that single sheet, from groceries to clothes for the kids. That way, you’ll see all your proposed spending in front of you, and you can get a closer look at what your true priorities are. You’ll be surprised at all the “essentials” that are not really that essential that you can cross off before you spend.

Talk to your family about spending: When you’re talking to kids about budgeting and lowering your expenses, you have to walk a fine line between discipline and fear. But setting money priorities is part of growing up, and it’s essential to discuss and agree upon them as a family.

Buy used for yourself: Make someone else’s poor luck your good luck. If you need clothing, a car or a new watch to replace the old one that’s past fixing, it might be worthwhile to buy second-hand. The best places to find these gems are on the internet on places like craigslist. Plenty of people have unloaded items in relatively good shape to bring in cash during the recent downturn. You might do very well, and if anyone asks, don’t call it used; call it “vintage.”

October 2009 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Martin V Higgins, CFP, CLU, AEP, a local member of FPA.

This is a story about two Fridays, separated by exactly 21 years.

Specifically, it’s an anecdotal recitation of the economic, financial and market disasters that have relentlessly plagued America and the world between those two Fridays, and of the remarkable – indeed, almost unbelievable – place that these disasters left us, 21 years later to the day.

The first of the two Fridays was October 16th, 1987. It was a pretty significant down day in the American stock market, after two consecutive but not terribly ominous declines on the Wednesday and the Thursday.
Stocks had actually been having a fairly difficult time since late August. Gold and commodity prices were rising with inflation concerns; interest rates had turned noticeably higher for the same reason. Equity valuations were historically very high, rendering the market vulnerable to some sort of correction.

But nothing on that Friday suggested the magnitude of what was to happen the next trading day: Monday, October 19, 1987. From the opening bell, stocks declined catastrophically. Because of a huge imbalance of sell orders, specialists on the floor of the New York Stock Exchange were unable even to begin trading some stocks for an hour and more.

Prices fell relentlessly throughout the day – and then accelerated, in a panic-driven rout, in the last ninety minutes of trading. When the tape stopped running, long after the close, the market was found to have fallen in excess of 23% — the largest one-day decline in history, before or since.

Time magazine’s cover expressed the universal consensus: “THE CRASH: After a wild week on Wall Street, the world is different.”

Not long afterward, in 1990-91, came a cataclysmic collapse in the real estate and banking industries. Any number of major banks were said to be teetering on the brink of insolvency, as the value of the collateral on their portfolios of home mortgages sank below the mortgage balances.

The savings and loan system in our country was liquidated under the auspices of a new federal agency, the Resolution Trust Company. A war loomed in the deserts of Kuwait. The first real recession in almost a decade took hold of the economy. And the stock market spiraled down into bear market territory.
Time’s cover showed silent film star Harold Lloyd hanging from a clock tower, and headlined: “HIGH ANXIETY: Looming recession, government paralysis and the threat of war are giving Americans a case of the jitters.”

Soon enough came the terrible summer of 1998: Russia, which had been the world’s hottest stock market the year before, defaulted on its sovereign debt, rendering its currency worthless. The largest hedge fund that had ever existed, Long-Term Capital Management, vaporized all its equity; it was found to be still holding billions of dollars of positions which, if they had to be settled all at once, would have caused the global trading system to cease to function. And, like malignant dominos, the world’s emerging markets and economies collapsed, in what came to be known as Asian Contagion 2.

All this brought on a bear market of incredible violence and suddenness in the U.S. No one was safe: even Warren Buffett’s shareholdings in his Berkshire Hathaway declined by over six billion dollars in 45 days.
Time’s cover showed an uptrending chart suddenly breaking and falling to the bottom of the frame, plunging people trying to stand upon it into an abyss. The headline: “IS THE BOOM OVER?”

Not very long afterward came the bursting, in early 2000, of the greatest stock market bubble of all time, as the dot.com mania crashed, and seven trillion dollars worth of equity values – four trillion on NASDAQ alone – turned to ashes. The country was once again gripped by recession. Then came the terrorist atrocities of September 11, 2001. And soon after, the horror of Enron, with all the corporate and accounting scandals that surfaced for months in its foul wake.

A howling bear – in fedora, rep tie and wingtip shoes – graced the cover of Time.

Then, in mid-2007 – with the stock market barely above its levels of seven years earlier – the housing market in this country collapsed, uncovering a seemingly bottomless cesspool of defaulting loans and worthless derivatives. These hundreds of billions of dollars in losses cascaded into a credit crisis that ultimately froze the financial system of the entire world, and sent our stock market into (at this writing) its third deepest bear market since the 1929 – 32 event.

Time’s cover featured a stark black-and-white photo of a line of destitute men waiting at a Depression-era soup kitchen.

This brings us up to the second Friday which bookends our litany of disaster: October 17, 2008 – 21 years to the day (if not precisely the date) after our story began – and, not coincidentally, only one day after the  greatest single-day percentage decline in the S&P 500 since October 19, 1987.

And where, after all this destruction and chaos, did equity values stand on the second Friday – five bear markets later — compared to the first?

Dear reader: on a total-return basis (that is, price change plus dividends), the broad equity market stood just about five times higher on October 17, 2008 than it did on October 16, 1987.

Five times higher.

This startling truth may suggest — to the long-term, goal-focused investor – a couple of very important conclusions.

The first is that what really matters isn’t the temporary erasure of equity values which happens during this or that evanescent crisis. It’s the staggering increases in values (and dividends) which take place in the great expansions which resume after – and ultimately overwhelm the effects of – even the most significant setbacks.

And the second is that the most reliable source of the accretion and maintenance of real wealth remains, as it always has been, the ownership of diversified portfolios of the great companies in America and the world.
Gold, and oil, and “new era” technologies, and condos in Palm Beach, and exotic hedge funds, and numberless other financial fads have always strutted and will always strut their hour upon the stage, drawing the hard-earned savings of the greedy and the credulous to destruction.

While the earnings, cash flows, dividends and share prices of mainstream equities march on – through crisis after cataclysm after unimaginable disaster – to fund the most cherished goals of the patient, disciplined long-term equity investor.

Take a good look around. Try not to think too much about where the values of the great companies are
today, late in this fifth major bear market in just 21 years.

Try to imagine – if you can – where they will be 21 years from now.

© 2008 Nick Murray. All rights reserved. Used by permission.