Don’t Repeat Old Financial Mistakes


Today’s flashback to 2008 follows the buyout of Bear Stearns, how their executives knew the financial reality and how the subsequent fallout of the failure of the large financial institutions was forming.  CNBC aired a special, Crisis on Wall Street, on the frenzy of reactions during mid-September 2008 to deal with the quick domino-effect of the bankruptcies of the country’s largest banks.  If you didn’t watch it, you can probably catch a rerun.

My first two articles are from June 2008. One article proves that the Bear Stearns’ executives knew that the subprime mortgage business was going to be a bloodbath but delivered a level of comfort to investors.  Regardless, the damage was done and the job losses were expected to be of historic proportions.

The third article reports on the job insecurity – that ultimately lasted for years.  Newly-unemployed people now had to compete for jobs.  I was in public accounting at the time and I remember thinking that I was lucky to not be working in industry.  Little did I know how far-reaching this would be.  I lost my job in December of 2008 because of a quick reaction to the fear of falling revenue.

I got a corporate job a few months later but employers basically exploited the job insecurity factor and many people, including myself, only stayed at their first follow-up job for less than one year.

Responsibilities for Avoiding a Personal Financial Collapse

Here are some reasons for the financial collapse.  We know what the big banks did, but here’s where you can take some precautions:

Reckless borrowing – not understanding the mortgage agreed to; not being realistic about ability to pay.  I myself had an adjustable mortgage, but I also had a career that was on the upswing.  When I first took out my mortgage, I was making way less than $100,000 a year, but I kickstarted my career and had several pay raises within a few years of owning my home.  After two years of a solid payment history, I refinanced to a fixed rate mortgage but the refinance was not based on the appreciation of the home, it was based on my credit history and built-in equity.

Blind faith on real estate appreciation – your wealth should not be dependent upon the future appreciation of an asset.  That’s like buying a stock and betting the farm on believing that it will go up in value.  That’s basically taking a gamble.  When the mortgage bankers got drunk with fast-moving mortgage products, they told buyers not to worry, that they could refinance when the property appreciated in value, and have that additional cash in their pocket.  That was the ignorance that buried many homeowners.

Buying the “American Dream”–  Just because someone tells you that you deserve the American Dream doesn’t mean that it’s for you if it’s not a financial reality.  It’s great to have dreams and goals, but even I lived in a basement for 9 years until I was able to have a down payment and be eligible to support a mortgage.  Be realistic.  Just because someone’s offering “free money” doesn’t mean that you should latch onto the deal.

On my next session, I’ll show some visuals on the volatility of the stock markets.

Always Focus On Making Your Money Work For You

On last week’s vlog, I talked about being the CEO of your life and generating personal profits.  I’d like to introduce how to take those personal profits and make that money work for you.  While you can save money in a low-risk account, the best way to utilize those funds is to invest wisely.  You’re only one person and can only work one job, well, maybe two, but your time is limited.  However, it’s possible to leverage from the resources of many workers.  When you invest that money into a business, you can earn a portion of that company’s profits.  That’s the beauty of investing. And it works on two levels – you can earn dividends and you can also benefit from the growth of the business.

If you listen to Jim Cramer on Mad Money, he touts stock investing as the best way to accumulate wealth.  There may be other ways, but for the average employee, I recommend it as well.

I’ll introduce some investing ideas in future vlog sessions, but I want to relate this discussion to a book I read recently.

The book is called The Millionaire FastLane by MJ DeMarco.  He’s a self-made millionaire and writes about becoming a small-business owner and paving your own way.  He basically denounces being a 9-5 employee, that you’re trading your time for a job that controls your time and life.  He disdains the typical 40-year 401(k) advice that leaves you with being shorted of the best years of your life.  It’s a great motivational read for people willing to take the risk of an entrepreneurial venture and he emphasizes the process and hard work that becoming self-made involves.  However, I don’t think it’s for everybody.  Things needs to be built, services need to be performed, products need to be sold.  We need construction workers, police officers, and sanitation workers.  And not everyone has the resources to become an entrepreneur, and even if they did, they may not have the crazy success that the author had.

Therefore, investing in businesses, i.e., stocks, is the most basic way to leverage your earnings into wealth accumulation.

Investing in Blockchain Technology

I’m going to save stock investing for another time because there’s so much information out there on stocks.  I want to talk about something a little but more exciting – cryptocurrencies and blockchain.  Crypto is often confused with blockchain or Bitcoin.  Bitcoin is the largest virtual currency by market value but if you hear the word blockchain, it is not synonymous.  Blockchain is the technology that creates the virtual currency.  According to the September issue of the Journal of Financial Planning, blockchain is the future and is soon to be life-changing.  The technology is moving into the fields of accounting, cancer research, insurance claims, and food safety.  Due to its efficiency in recording transactions, it stands to disrupt many industries.  There is a tremendous opportunity for wealth by buying into this now.

Read this article:

I own Ripple and have it saved in my offline Ledger wallet that’s locked in my fireproof box.  I own a little bit of Ethereum and Litecoin in a Coinbase account as well.

Like Cramer says, your first $10,000 should be in plain vanilla index funds.  Then you can expand into other investments.

Join me next week for more fond financial crisis memories, more causes of the economic collapse, and the next new crisis.

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