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.

Photo By: astro_wout

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

The title is a quote from Super Bowl winning coach Bill Parcells. The idea is that a team is as good or as bad as its record indicate.  Fans, commentators, and even players like to interpret – or rationalize – circumstances and game events so as to suggest that a team is better, or sometimes worse, than its record might suggest.  A lucky bounce here or a bad call there and those close losses are wins, see, ‘we’re better than our record suggests’.

Parcells on the other hand will have nothing of it.  His take is that a team’s record is its bottom line.  Explanations and rationalizations will not lead you to a championship season, only your results on the field of play.  So rather than tell me that you’re a good team, show me.

Life often parallels sports, or is it vice versa.

We have a bottom line metric that tells us without question or explanation how we are performing in the arena of our personal finances.  Too many assume this metric is our level of income.  But income alone is like the team who scores points in bunches only to watch their opponent do the same.  It (high income) can contribute to a win, but it is not the only ingredient in the winning process.

Rather, the key metric – the record indicating the relative success for our financial play – is our Net Worth.

For purposes of example, consider the wealthy business man living in the McMansion, funding newly leased German luxury sedans and Caribbean vacations rather than retirement or junior’s college education while sporting an array of $1000 suits.  The dude is loaded!  And doubly so when compared to the unassuming school teacher living in a quiet townhome and driving the 10 year Corolla raking perhaps a third the income.

But a funny thing happened on the way to a cozy retirement.  The schoolmarm contributes to her 401k (or equivalent) has steadily paid down her mortgager, and traded a monthly car payment for a positive monthly cash flow.  Meanwhile, the business man’s killer income has washed through his hands like so much water.  His kids are in private schools and travel soccer teams, his perpetually renewed leases provide a relentless and growing outflow, the leveraged dream home is upside down and retirement planning begins with the next raise or perhaps the one after that.

Hey, it sounds like fiction, but I’ve read enough Money mag “Real Life” segments and observed the bevy of Lexus’ in my office parking garage to know that too many folks are working away for the now rather than the future.  Sure they may be paying attention, but to net income and cash flow rather than to the bottom line – Net Worth.

So what is this Net Worth number?  Trent over at The Simple Dollar offers a great illustration of the mechanics, so I’ll send you here rather than recreate his efforts.  But suffice it to say that Net Worth sums the net value of your assets against the net value of your liabilities.

Simply stated:  Net Assets – Net Liabilities = Net Worth

In the example I provided, the business man with his leveraged home, car debts (a contracted lease obligation is the same as a debt… try breaking a lease if you doubt it), and limited savings may actually have a negative net worth.  For all his outward appearance he has nothing but debt to show for his efforts.  Whereas the teacher has learned the lesson taught by others – she has bulked up savings and equity in her home offset only by her mortgage balance.  According to her financial record, she is putting together a winning performance.

Now fast forward to the very end of our individual games.  Our net worth will represent our final estates.  It is the legacy we will or will not be able to leave behind to the ones about whom we care.  Dave Ramsey uses a line when talking to callers trying to settle an estate.  He is not meaning to be harsh, but reality is sometimes cold.  Depending upon the structure of the dialogue he’ll ask or comment (paraphrasing) “there is nothing left to show for the estate”.

When I hear this comment, I personally rephrase the question in my mind – rather harshly I might add – as motivation for myself:  “financially speaking, there is nothing to show for this person’s life work but debt”.

Now, the key is “financially speaking” because we’re all worth more than the money in our accounts, but this is how I repeat the question to myself and it forces me to consider how I’d want it answered upon my coda.

At a minimum, I don’t want my final possessions liquidated to pay my accrued debt.  Nor do I want creditors hounding my loved ones for payment when I’m gone.  So I find it important to keep score.

And, because one day I want to enjoy more of life’s finer things – including a dignified retirement – I actively keep score.  I monitor my net worth on a monthly basis and track my percentage change month over month.  I’ve written before about my net worth goals, and it is a winning score most anyone would be pleased to accomplish.  However, I’m now tracking my progress in a way that allows me to be intentional in my actions relative to those goals.  While that does not by itself ensure success, it sure crystallizes my game plan and directs the path for my execution.  One day I’ll look at my record and feel a touch of pride, because I’ll know both what it says and represents.

Photo By: AMERICANVIRUS

Your Turn – If you enjoyed this article, I would personally appreciate it if you would consider commenting below and/or subscribing to our Free Updates via email or RSS updates.  Thanks!

“The Biggest Recession since the Great Depression” seems to be a favored storyline and the media has certainly had its fun with the premise.  Yet so much of it is tired and breathless drivel.

But featured in the May issue of Smart Money is a smartly correlated discussion of the then and now.

The idea is simple and elegant and seemingly impossible:  Find former brokers that actually worked on Wall Street during the Great Depression and report their opinions on the realities of today.

But this is no simple task.  Shameless pun notwithstanding, this is a dying breed.

Nonetheless, three such experts were identified and in age they ranged from 92 to 103.

Now my intent is not to rob your enjoyment in reading the full article so I’ll simply share some of my favorite points.

• All 3 are still actively managing funds today – albeit with lighter schedules
• 2 of the 3 worked with Benjamin Graham, known as the father of value investing and author of Security Analysis. (if you require further endorsement of Graham and his work then consider that Warren Buffet is also a Graham disciple)
• All 3 favor running numbers and churning through annual reports rather than summarized analysis and computer models which fuel many of today’s market experts
• A bargain does not equal a sure thing
• Stock Market news in the Great Depression was not widely reported because only 10% of the population was invested in the market – or only the wealthy… hmm – my commentary…what does this say about the long term viability of current trends of taxing or punishing the rich?
• Today’s economy doesn’t compare to the 20’s and 30’s due to its diversity… back then the economy relied on only a handful of industries – banks, railroads, utilities, and oil companies, whereas today our economy is additionally fueled by giants in the technology, healthcare, and services arena… hmm – more of my commentary… how might we expect solutions of yesteryear to save us today?
• “If investors today were a little less emotional they would see that this could be a good opportunity” claimed one of the experts heralded by Warren Buffet as a “Super Investor”
• One contributor railed against consumer debt and “the deteriorating caliber of our political leaders” in the early 2000’s – when he was in his late 80’s

So what do you think?  Are these old guys on to something or are they past their time?

Photo By: onohoku

Hey guys, I really should have held my recent Link Round-up post because as I cleaned out my magazine bin Sunday afternoon I crossed paths with a couple items that I also wanted to share and comment on with you.

Oh well, that’s the beauty of the blog format - it’s all free form.  So here are some additional random items: 

I just participated in my initial Blog Carnival – the post just went live on Monday, March 23.  Four Pillars hosted and it is entitled Learn The Basics of Investing – Edition #197 of the Carnival of Personal Finance.  The carnival is managed by the good folks at Carnival of Personal Finance.

I’ve heard for several weeks – since I started researching and subsequently launched this blog – that carnivals were great ways to increase visibility and traffic.  I’ve also collected this direction from fellow bloggers who strongly recommended this activity.  So while it is too early for me evaluate the results from this single event, I expect that I’ll be participating in this activity moving forward. 

Here are 3 other things I’ve learned SO FAR from this experience:

1. Participating in a carnival is pretty easy!  This edition and another for which I’ve submitted an article only require a simple entry form.  It may take 2 minutes to submit an article!
2. Hosting a carnival is a HUGE EFFORT!  This edition must feature 95 articles each of which must be reviewed/screened commented upon and linked.  I know from my little experience so far that this represents a huge effort.  One day I’ll host a carnival but I’ll be sure to clear an afternoon for the effort.
3. The community is great!  Simply review the comments following the carnival for an idea of the goodwill and appreciation that exists here.

Other Random Items to Share and Discuss (via the comment section at the end of this article)

• In the April 2009 edition of Money magazine there’s an interesting article on the Life Cyle of Conspicuous Consumption – the article is not yet available on-line but I’ve linked to the mag site.  The joke I pulled from the article (intended or not) is that some high-end stores – Hermes was their example – are offering plain white bags to their shoppers rather than the normal garishly branded ”look-at-me” bags.  This new approach is comical as I find it truely reveals the shallow and image conscience nature of the shopper.  First, it assumes that your consumption patterns impact my ‘fragile’ pyshce (exactly how self centric is that?); and second, it really creates a new uber-elite status symbol as only equally dim-witted consumers will recognize your ‘plain’ bag.  Ha ha… you rich and spendthrift morons.

• My favorite magazine – Sports Illustrated – ran 2 great features recently – I’ll start with the more light-hearted topic – even though it is quite sad:  How (and why) Athletes Go Broke.  It is ridiculous how some of these guys waste money simply because they can’t or won’t do simple math.  One clown was paying a “friend” $5000 per month to insure 2 cars.  Another was allowed to file for bankruptcy due to a failed ‘investment’ even though he had multiple millions due him via guaranteed contracts.  Yet another lost $80,000 in a deal to market life perservers for your furniture – you know, in case it floods.  The sympathetic angle comes into play when you consider the education and background many of these athletes have and the “impervious” mentality required by many to achieve at such high levels.  That they maintain their ‘posse’s’ is understandable to a point, but when they are accosted by bloodsuckers while attending a family furneral, as one player shared, should serve as a tremendous wake-up call.  This is a worthy read… you’ll certainly laugh but a part of you will cry too.

• The second Sports Illustrated story is entitled “The Shot That Saved Lives”.  The premise is that a shot by University of Alabama guard Mykal Riley in a 2008 SEC Conference Tournament, which sent a game against Mississippi State into overtime, may have saved lives.  This idea carries weight when, as the story unfolds, you learn that during the overtime period – when many would have been walking back to hotels, parking or mass transit outlets – a tornado struck downtown Atlanta exactly where 1000s of fans may have been had the game ended as scheduled.  That’s pretty amazing… even more amazing is the story of how Mykal arrived at Alabama to even be in such a position to take/make the shot.  You know through reading my meme that I enjoy seeing how life’s details fit together… this is a truly amazing illustration.  Sports fan or not, this is worth checking out.

As a tease… and as a means to engage each of you as my accountability partners… I have set out to create an eBook.  I’m in the very early stages so there’s no timetable at this time but stay tuned.  I’ve been reading some things that are motivating me to action… so now you know.

Thanks again for reading along with me.  If you enjoyed this article or any of my previous articles then I ask that you help me by doing 3 really simple things…

1 – post a comment below or on your favorite article.  I love reader comments and reply to every one of them

2 – subscribe to either my emails or RSS feeds… they are free and an easy way to ensure that you don’t miss any of the excitement

3 – share this site with a friend… I really want to grow my reader base and can do this the fastest with your help!

Thanks!