Happy Recession Anniversary
by: Dave Ozment
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.
Opportunities Abound
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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Good article Dave, it provides some good advice.
You’re Your Bailout – these are poignant words, and probably the most important in this article. The media assaults us with messages that we need x,y, and z, while the steady flow of information via the internet, TV, and paper publications assure us that we deserve to live a life of luxury, no matter the cost. Seemlingly everyone is living the high life, so why shouldn’t I?
No matter your income, be it $2k/month or $20k/month, live a little below your means. The first order of business is savings, both short term and long term. The short term savings is for those gotchas – car repairs, unexpected medical bill, annual tax bills, a down payment on a house, etc. The long term savings is for you to eat and put a roof over your head when you’re too old to work.
I cringe when I hear people say they’ll retire on social security and perhaps the sales proceeds of their home. With all the struggle to stay afloat in their 20s and 30s, too many people forget that the clock is ticking, and they can’t continue to satifsy immediate wants if they intend to prosper.
It’s always important to keep your eyes open to what’s going on around you, and to react to it. For example, as real estate prices spiraled upward to the point where there was no affordable housing for the service sector, it was clear something had to give. That’s when I gradually withdrew my money from the stock market – in the March-May 2008 time frame, and tucked it safely in to CDs. I didn’t have a crystal ball, and had no idea of the severity of the impact this would all have on the global economy, but my gut was telling me that things were off kilter. It’s imperative to be aware, and to react.
No one is ever going to bail me out. I have to plan my strategy so that I never need to be bailed out.
Hey Lara… I love your spirit of self determination and accountability. Planning to fall back on social security is the same as not having a plan. You’d never hear a trapeze artist share they his or her plans were to land spectacularly in the safetly net, rather they will boast of their plan to soar through the air. Similary, choosing the lowest common demoninator is not a plan, it is failure.
Paying attention is important and it seems that you made some sound moves prior to the market tanking. I’m not a fan of trying to time the market, but I like the idea of reading and reacting to cues and adjusting course accordingly. I think there’s room for difference between those lines of thought. I’m glad to hear that you charted a course that allowed you to sail through most of the turmoil as smoothly as possible.
Thanks again for your comments Lara, I appreciate the discussion and feedback!
Dave
Hey Lara, just a tease for an upcoming article… but you mentioned marketing schemes designed to influence folks to buy x, y, and z. I have a sort of rant piece coming out Tuesday than plays a similar score… I hope enjoy it, let me know either way.
Thanks!
Dave
Excellent points especially “Panic is a killer”. Couldn’t agree more. Time and time again it pays to stick with an investment through the difficult times or to buy into a panicked market, because the long term rewrads are well worth the temporary crisis
Exactly… too many confuse investing with saving… I invest over a long time horizon while I save for a specific purchase or event. If we can cement this mentality, we’ll allocate our dollars appropriately and the test will settle out over time.
Thanks for commenting!
Dave
Yep, our home’s economy looks very much the same as it did a year ago. Don’t get me wrong, we were impacted by the overall weakening of the economy, primarily by the loss of OT and a 10% cut in base salary to boot at my work. I have never been more thankful that we followed the Dave Ramsey plan and had the flexibility to absorb the hit. I also realized it had been about a year, and it inspired me to write a little Dave 101 post about the Baby Steps on my own site this week.
Keep up the good work!
.-= Dustin | Engaged Marriage´s last blog ..Dave Ramsey’s Baby Steps: A Real Path to Family Financial Freedom =-.
Yeah, it just like building a house… having a sound and solid foundation will help you weather the storms. That is not to say that damage may not occur, but that it will be survive-able whereas, a shaky foundation may cause the entire works to topple.
Good post on Dave’s Baby Steps. I’ll have to link it in an upcoming roundup.
Dave
Interesting how much has and has NOT changed in a year. CIT just went into Chapter 11. I am thinking the majority of companies which received those – too big to fail bailouts – have all failed! I am fearful of many of the unknowns all of this country debt will bring. I feel us being painted into a tight corner in the future.
I have learned much about money, planning, waiting & going against those experts opinions. I have learned that if my money was not tied to debt, I could be making money with a down stock & real estate market. I hope to continue to make out while others fail to learn from the past.
Great points J… learning lessons from our our past and our experiences is the key to moving forward… the world will let us try to learn the same lessons over and over again, or we can climb up from each lesson.
I’ve written in the past about the opportunities that a recession actually affords those who are ready and equiped – see my article on the “next recession” where I predict that the next one will make me a millionaire because I’ll be ready to capitalize. That’s not meant to be mean spirited but aware that cycles spin by we can plan to remain on top.
Thanks!
Dave