What does the 2008 financial crisis mean for average people like you and me? Unfortunately, it’s too soon to say. We can, however, begin to reflect on what these messy economics have taught us, and how we can apply that to our personal finances.
1. It started with easy credit. Many people are (understandably) baffled by all the factors that contributed to our current economic mess. But the one thing most of us understand is this: Banks approved too many mortgages for people who couldn’t afford them. Lesson: Just because a lender says you can afford it, does not mean that you can. Anytime you make a big purchase or take on credit, soberly assess your own financial situation and determine what you can afford.
2. Banks are not invincible. First IndyMac fell, then WaMu, and Wachovia. Even a year ago, few people would think that a savings and loan—much less the largest in the country (WaMu)—could go belly up in a matter of months. Lesson: Never put all of your eggs in one basket, or more than $100,000 cash in an FDIC-insured account.
3. Home prices can go down. A real estate bubble led millions of Americans to gamble on interest-only mortgages featuring low monthly payments for five or ten years before shooting sky high. Buyers assumed profits were a sure thing. When they weren’t, homeowners owed more than the homes were worth and worse, faced payments they couldn’t afford. Lesson: While your primary home may appreciate, real estate—like any investment—carries risk. Put 20% down and buy a house you can assuredly afford.
4. Don’t trust anybody. People lie, cheat, and steal. Whether or not today’s crises result in any criminal convictions, some of the banking practices that got us here were dubious at best. But money was being made, and so everybody turned their heads. Lesson: Question authority, arrive at your own conclusions, and, if needed, go with your gut. Never assume just because somebody is a professional they are 100% right all of the time. Diversify your information sources in the same way you diversify your investments.
Have you taken anything away from the events of the past few weeks? Is there anything you think we all should take away?