A couple weeks ago I read an interesting article in Smart Money entitled Lessons from the Crash. While the specifics of the story were geared towards those given to single stock investing, it was more the premise that caught my imagination.
The set up was the top 5 lessons investors have learned over the past 12 months, the spiritual if not literal anniversary of the downturn.
So that got me to thinking. What are 5 financial lessons I’ve learned or revalidated over the last year?
Debt is Risk
It is the easiest and most straightforward principle in the toolkit, yet the hardest to execute on. The idea of debt reduction is so impossibly intriguing that simply talking about it has made some folks quite wealthy, yet it remains a struggle for most and others have seemingly given up and claim the shackles of their creatively contrived debt are signs of their own financial enlightenment.
But the harsh reality is that every claim on your ‘as yet to be earned’ income represents risk. If you’re still not sure, try imagining the next six months without an income. How would that impact your current reality?
I’ve written before about the idea of our financial footprints. I use this term to define the monthly cash flow required to fund our current existence. In my experience, debt is the most manageable variable in this equation. At its peak, my footprint was over $4100 per month and it was ripe with student loans, and furniture payments, and credit cards. Had I embraced the average American’s car payments (one flavor of debt I had already managed to shed) for new ‘his and her’ sleds, I would have been bumping $5k a month in pre-obligated expenses.
Fortunately, I woke to the realization that debt is risk before the economic down turn and waged an attack such that last year when things started to turn, and a then unknown stint on the rolls of the unemployed loomed, my footprint was down to a more manageable $2400. And while there is still room to whittle, the shift from debt yielded obvious results in our household.
Green is Good
Paper or plastic is mostly commonly asked as it is related to how you prefer to transport your groceries not how you wish to acquire them. If, as we previously covered, debt is a risk then fat stacks of cash are sweet comfort. Consider the footprints we stepped through above and imagine how cozy you’d sleep at night if you had 6 times that amount in cash tucked away in a savings account to help insulate you from life’s unexpected moments.
No one would argue against the security afforded by accrued cash, but few have the resolve to save. However, if the last 12 months have taught us anything, it is the significance of setting something back.
Panic is a Killer
In doses, fear is healthy. It causes us to lock our doors, follow traffic laws, and flee burning buildings. However, fear traded at wholesale quantities is lethal. Consider those that dumped their stock as the market started to spiral and those who continued to sell even as the bottom settled. In many cases these are the same folks who are now missing out on records returns.
This is not to say that folks didn’t take a beating when the market tumbled, I know I sure did, but the vast majority of folks would have done well to unplug the panic button rather than the invested dollars. Unbridled fear clouds our judgment and prevents us from seeing events as part of a larger whole. Sure, a 40% drop in value is cause for concern, but selling out only locks in losses, losses from which many may never recover.
You’re Your Bailout
The most annoying aspects of the economic downturn were all the governmental bailouts. Each party hosted a spending free-for-all so this is not a political statement, but rather an indictment on the concept of big government stepping in to save us. The reality is that we are our own bailouts. Our time and energy and efforts have an immediate and direct impact on our reality. Consider the relative size of our economy and limited impact the nearly $2 trillion – that’s $2,000,000,000,000, a ‘2’ with 12 zeros! – in bailout dollars has had. Folks are still losing homes and national unemployment remains in the crapper. The macro economy it too big to be bailed out, however, consider your individual economy and the impact a quick $1000 influx from a second job might have. A second job sustained for several months may boost your bottom line by $10,000. Sure, it’s a lot less zeros, but they’re all yours and powerful when applied directly to your point of need.
Historically speaking, downturns on our economy have planted the seeds for fantastic growth and the explosion of personal wealth for those poised to take advantage. Now, I’m not claiming to have the corner on wealth building ideas, but I agree with the principle and am motivated by its promise.
Perhaps the reduced staff in your office is providing you an opportunity to demonstrate additional value – value which may enable you to grow your income with your current or future employer. Perhaps low stock prices are preparing your 401K for explosive growth. Or perhaps reduced mortgage rates are allowing you to realize significant monthly savings.
Whatever the case, the events of the last 12 months should inspire – or force – you to look at your situation in a new way. And with a keen eye and open mind… who knows what you might see.
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