Nobel laureate economist Gary S. Becker recently estimated that the physical and human capital lost in the September 11 attacks was worth "somewhere between $25 billion and $60 billion." He further estimated that the loss amounted to 0.06 percent of our $130 trillion in physical and human capital.
It doesn't feel like 0.06 percent, does it?
The greatest problem all of us have in dealing with our new world of terrorism is the chasm between our emotional response and a calm assessment of how things have changed. In fact, the September 11 attacks may mark an abrupt end to national denial about rising risk and uncertainty.
What denial, you might ask? We have endless reminders on television that life is hard, dangerous, and uncertain.
But we have yet to change our behavior, particularly in our financial planning.
One person who sees this most clearly is Teresa Sullivan, a professor of sociology who is also Vice President and Graduate Dean at the University of Texas at Austin. When I visited her early last month, she pointed out that the rising tide of personal bankruptcy was directly linked to our economic behavior. We have failed to reduce our spending and borrowing habits in the face of increasing risk and uncertainty.
• As job security declined, we leased cars and added more credit card debt.
• As our medical insurance diminished, we saved less.
• As more families went through the upheaval of divorce, we took out equity lines of credit and second mortgages on our homes.
Based on the pattern of layoffs that had prevailed in recent months, she said we could be heading toward a new record for personal bankruptcies, perhaps as high as 1.7 million households.
Professor Sullivan has spent much of the last two decades researching personal bankruptcy in America. In "The Fragile Middle Class," coauthored with Elizabeth Warren and Jay Lawrence Westbrook, we learn that we're acting as though our lives were increasingly secure. In fact, the safety net for most Americans has actually been shrinking.
Domestic terrorism adds yet another level of uncertainty. The most dramatic uncertainty is a new risk of physical harm. The broader risk is that everyone in America must now live with abrupt economic change.
So how do we alter our financial planning?
We do what we should have been doing all along.
Here's a list.
• Review your life insurance. While the risk of death has not increased materially, most people don't carry enough life insurance. Many have life insurance that ends when their job ends. This is a good time to review your actual insurance needs and to shop for competitive 10 to 20 year term life insurance policies.
• Build your emergency fund. Separate most people from their jobs and the 'repo' man isn't far behind. As millions of recently dis-employed Americans are learning, unemployment compensation checks don't cover expenses when you've got car and Visa payments. An emergency fund of 6 to 12 weeks of net pay can help you avoid a depressing cash crunch.
• Commit to eliminating credit card debt. Credit cards are a great convenience if you are among the 43 percent of all cardholders who pay the full balance each month. For almost everyone else they are a source of needless expense and creeping debt cancer. Credit card debt is where we clearly show the disconnect between the real world and the world of our illusions.
• Try a Debt Reduction Planner. Available on the web through Quicken.com and MSN MoneyCentral, these handy programs will tell you which debts to pay off first. They also calculate how much interest you can save.
• Start Keeping Track of Your Spending. If you know where your money goes you'll feel more secure. You'll also be able to change how you spend if it becomes necessary.
The general goal here is very simple: build what analysts call "free cash flow" so you will have more flexibility. Do that by building a map of where your money goes so you can change if it becomes necessary.
Scott Burns is the retired Chief Investment Officer of AssetBuilder, the creator of Couch Potato investing, and a personal finance columnist with decades of experience.