Carolyn Bigda and Paul Lim present an entirely new viewpoint on financial risk – considering one’s investment risk as comprised of two parts – investment choices, and personal income risk. This is an excellent approach, but applies not just to those with a secure lifestyle and mere disappointment with their 401(k) – those with serious debt can benefit equally from their advice.

Entitled “The 7 New Rules of Financial Security”, they go on to mention the mantras:

“Risk isn’t about your stomach [anymore]. It’s about making or missing an important goal.”

“Relying more on cash can rescue you in an ‘asset emergency’ [in this new economic environment].”

“Time isn’t everything [anymore]. You must also consider your earnings potential.”

“Borrow cautiously. You have to worry about [other's exposure to debt given its impact on all areas of your financial sphere] too.”

“Your home won’t make you rich [as previously thought]. But it is an important savings tool.”

“Diversification won’t always save you – and you need more of it than you think.”

“Retiring early is a problem [rather than a prize, as previously thought].”

What can someone with debt glean from this?

For one, the list underscores the centrality of examining one’s own financial situation honestly and making realistic financial goals in both the short-term and long-term. Second, the importance of cash to smooth over any unexpected changes to income or costs makes the most difference for someone with loads of debt and income insecurity because the cost of dealing with any particular financial emergency (accident, medical, disaster, loss of income, etc.) is exorbitant. Wisely set aside funds into an emergency account that includes non-discretionary expenses for a number of months. Forgoing “discretionary pleasure” is worth the change in strategy, at least temporarily. Also, someone in debt must take their income insecurity and job forecasts into account when making financial decisions. Simply wishing for the best outcome will not do. If you honestly think a pink slip is on the horizon, plan for it in your finances.

I must stop at the fourth point and encourage someone with debt to actually not “borrow cautiously”. Instead they should not borrow at all. Borrowing cautiously in this context means mortgages and educational expenses. Someone with debt should not be making a down payment on a home and signing a mortgage contract. There is nothing wrong with continuing to pay rent until you have ample savings and income security to make a bigger investment, and its the smart route to take, hands down. For school, if one does not rake in the scholarships or tuition waivers, the best strategy is to attend community college and then transfer to an affordable institution to earn a bachelor’s degree. The quality of work done, grades earned, and extracurriculars pursued at any school will go a long ways towards positioning a young adult for a good job, income, and even a quality graduate education.

Investment diversification is extremely important, but from a short-term decision standpoint someone with debt simply cannot afford to focus all of their energies on funding a 401(k), Roth IRA, or even a college savings plan. Instead of pulling funds out of accounts and incurring penalties, though, simply stop making additional contributions and instead turn those payments over to debt reduction.

Retirement? Getting out of debt is the first step towards getting on the path towards a reasonable retirement, so get organized, set up a budget, reduce discretionary expenses, and design and implement a debt elimination plan, no matter how simple it is.

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.