“What should I do with my money in this troubled economy?” This is a question I am often asked by readers, friends, family members and people I meet at parties. Usually the first question is followed by: “What stocks are a good buy?”

I inevitably ask the person the following questions:

• Do you have any money saved? Specifically, do you have three to six months of living expenses saved for an emergency in case you lose your job?
• Do you have any credit card debt?
• Do you have all the insurance you might need?
• Do you have a will, preferably one that isn’t written on the back of scrap paper?
• Do you have any investments and are they diversified?

Return to basics

I ask them these questions because in troubled times, your best financial defense is to go back to the basics.

That’s why the Color of Money Book Club selection for August is Ric Edelman’s “What You Need to Do Now: An 8-Point Action Plan to Secure Your Financial Independence” (HarperBusiness, $9.95).

“This book is intended to return you to the basics, to help you put into today’s context all the aspects of your personal finances that you’ve ignored, avoided or failed to know about,” Edelman says in his introduction. “Now, more than ever, you must tend to these fundamentals, because the best way to succeed in difficult times is to make sure you have all the basics covered.”

Keep a cash reserve

So, what’s the first step in Edelman’s 8-point plan? Establish a cash reserve. How much?

Edelman recommends you track your monthly expenses. Review your checkbook and credit card statements for the past six months. The idea is to have enough money saved to cover your monthly expenses (rent or mortgage, utility bills, gas, food, lunch money, etc.) for three to six months.

“Never touch your reserve unless you incur a crisis, just as you’d never touch your umbrella unless it started to rain,” Edelman warns.

And, before you ask: No, this is not money you should “invest.” It is money that should be kept liquid, meaning you can get your hands on it quickly.

Think savings or checking account, money market funds or short-term certificates of deposits (CDs). In fact, you should have a cash reserve before you invest.

I know. I know. Such accounts are paying pitiful interest rates these days. But keep in mind this money isn’t money you’re trying to grow. It’s money you are trying to preserve and keep handy in case something goes wrong.

Insurance stability

The next step on Edelman’s list is to make sure you have all the insurance you need. Do you have enough life insurance? Review your health insurance plan. When was the last time you took a look at your homeowners insurance? With housing prices rising, you may need to increase your coverage.

Do you have disability insurance? Admittedly, this insurance can be costly. However, as Edelman points out, “If you can’t afford the premiums, how will you be able to afford the loss of income that results from being disabled?”

Other helpful tips

Here are a few more of Edelman’s tips to “maximize your family’s financial security:”

• Preserve your assets by taking the time to prepare a will.
• Maintain a large mortgage. This is by far the most controversial piece of advice in the book. Edelman says don’t send extra cash to your lender in an effort to pay off your loan early. My grandmother, Big Mama, would vehemently disagree and yell at me for even passing this along. But Edelman preaches that instead of building up equity in your home, keep your money and build up your cash reserves, savings and investments instead.

“Mortgage loans offer you the cheapest money you’ll ever borrow,” he writes.

• Make sure you have a highly diversified, long-term investment portfolio. Specifically, he recommends mutual funds over buying individual stocks because mutual funds own dozens, sometimes hundreds, of stocks. And what’s diversification?

“Rather than regarding investing as a horse race (where you’d better pick the right horse or face losing everything), as most investors see it, you should regard investing as a game of horseshoes (where being close is good enough to win). Don’t ever put all your money on what you hope will be the winning horse. Instead, place small bets on every horse.”

• Include charitable giving in your financial plan. “As you focus energies on yourself and your family, please remember those around you,” Edelman says of the last point in his plan.