Rethinking Your Finances

"People started to put their financial houses in order and they recognized, in a matter of a few moments, that everybody is vulnerable," says Sheryl Garrett, founder of the Garrett Planning Network, a nationwide network of fee-only financial planners.

Sales of life insurance spiked. Parents met with estate-planning attorneys to create wills. Others re-evaluated their lives and took early retirement as suddenly spending quality time with loved ones seemed more important than a few extra dollars in the nest egg.

But as time passed, many of those changes proved to be short-lived. "We promised ourselves to get our financial households in order five years ago," Garrett says. "Have you done it?"

On this fifth anniversary, her advice is simple: As we watch the commemorative events unfold, let's use this opportunity to reflect and evaluate, much in the way we did in the days and months after 9/11. "Use this memorial as an opportunity to do what's in your family's best interest," she says.

From life insurance to lifestyles, here's what Sept. 11 taught everyday Americans on the personal finance front — and why it makes sense not to forget those lessons five years later.

A Wake-Up Call
The strongest evidence that 9/11 caused families to think about protecting themselves — financially — was seen in the life insurance industry. "Sept. 11 woke all of us up to our own mortality," says Diahann Lassus, a Certified Financial Planner (CFP) in New Providence, N.J. "It caused us to think, if something happens to me, what would happen to my family?"

In the immediate aftermath of 9/11, Americans across the country scrambled to fill in the gaps. Applications for individual life insurance policies jumped by 8.6% for the nine-month period between October 2001 through June 2002, compared with the same time a year earlier, a significant increase, according to the Insurance Information Institute, a New York-based industry information group.

That spike, however, was short-lived. Applications volume leveled off in the following months and, since the middle of 2002, has actually been declining. That's a mistake, Garrett says. "Overwhelmingly, the people I run into — the average Americans — are drastically underinsured," she says. "And that's not an expensive thing to fix."

Riding Out the Market Plunge
Most financial planners sent out letters to their clients in the days after Sept. 11, reassuring them of the market's long-term resilience and warning them not to act upon their fears. But not everyone listened. "There were many people who did, in fact, pull out of the market instead of riding through it," says Lassus. "Now we know that the folks who stayed in and continued to invest, certainly did better."

Nearly $30 billion left the stock market in September 2001 alone, according to the Investment Company Institute, an industry trade group. In 2002, investors cashed another $27.5 billion out of stocks, while pouring more than $124 billion in taxable bonds.

Needless to say, cashing out was a mistake. "We have so much [market] history to the point where we see that things do eventually even out," says Barbara Steinmetz, a CFP in Burlingame, Calif., who reassured all her clients in the days after Sept. 11 that they should stay put in terms of their investments. "Every one of my clients is better today than they were on Sept. 10," she says.

The fact is, over the long term the market has proven its resilience in the face of geopolitical events like wars, bombings and yes, even the terrorist attacks of Sept. 11. The Dow Jones Industrial Average lost 14.3% in the 10 trading days immediately following the attacks, according to Ned Davis Research, a stock-market research firm in Venice, Fla. Yet it rebounded to its pre-9/11 levels within 40 trading days.

Unfortunately, that's a lesson many investors haven't yet learned. According to a recent investor behavior study by fund research firm Dalbar, while the S&P 500 index returned an average 11.9% annually between 1986 and 2005, the average equity-fund investor made only 3.9% a year. That's because of the prevalent investor mentality of selling when the market goes down and buying back in when it goes up, notes Kresh. (For more on this phenomenon, click here.)

A New Way of Thinking
In the months after Sept. 11, Nancy Langdon Jones, a CFP in Upland, Calif. saw a remarkable change in the way her clients thought about money and their lifestyle. One, a firefighter living in California, decided to take early retirement after visiting Ground Zero shortly after the attacks. "He had a couple of years left and it would have made a difference in his pension," she says. "But we talked about it and he said, I want to spend more time with my family." Two other clients, a couple, had dreamed of opening a dog kennel in about 10 years. Instead, they're doing it now and "they're thriving."

"People are acting on their dreams and I think the terrorist attack was instrumental in helping them decide to do this sooner, rather than wait for this one day," Jones says. "Because who knows what's going to happen by then."

It's a phenomenon that many planners say they experienced with their clients. "Everybody I talk to stepped back after 9/11 and said, 'Why are we working so hard?'" says Garrett. "And they stopped worrying about how to get the best return on their investments, but rather, how to get the best returns on their lives."

But that came with a worrisome side-effect, Garret says: we've been spending too much money to achieve it. "We took a good lesson about spending time and energy on our family and personal lives, and we took it to the extreme," she says. "And instead of protecting ourselves, we decided to start treating ourselves."

In an environment of low interest rates and readily-available credit — the Federal Reserve slashed its federal-funds rate from 3.75% to a record-low 1% over the 21 months after Sept. 11 — consumers certainly didn't have a hard time spending money they didn't have. Even President Bush encouraged spending in order to help the economy recover.

The personal savings rate, as a percentage of disposable income, was a negative 0.9% in July 2006 (the latest data available). Looking back to 2001, the savings rate dropped sharply, from 3.5% for the third quarter of the year to 0.5% in the fourth.

And while the housing boom of the last five years may have been an easy excuse for spenders, these spectacular returns aren't likely to repeat themselves any time soon. (For more on this, read our "9/11 Plus Five" story on real estate.) Yet another reason why this Sept. 11 anniversary is a great time to take stock of our financial well-being.