I’ve been asked several times, why am I so conservative with my money? What has driven my passion to become financially fluent?
Normally, I would always respond with something like, “my goal is to be debt free, so I’m using every trick and strategy in the playbook to make it happen” or “I’ve got a family now and I feel responsible for making sure we are financially secure.” Both responses are genuine and very true, but in my own spare time I’ve questioned myself to understand even further. Why do I respond this way? What has shaped me to become financially conservative? Why am I so risk adverse?
Reflecting on this has brought me back to a very sensitive part of my life and has reminded me of many experiences I did not enjoy. However, I realize that millions of Americans may have similar stories as I do. As my team and I continue to build MoneyQlip, I want you to know my story and what drives me to do what I do. I’ve found that the root of it all stems from the 3 financial crises I’ve experienced growing up.
As we all know, September 11th was the worst attack on America in recent history. According to The Times, when you factor in the loss of the value of life from the thousands of people who perished, the infrastructure damage, and the cleanup, the financial impact was estimated to be $74.8 billion. This horrific day impacted the airline and tourism industries, increased defense spending and consequently the cost of war, affected our taxes and monetary policies and our overall economy.
The stock market closed for 4 days after 9/11. When it reopened on September 17, 2001, the Dow immediately dropped 7.13%. Then, the Dow dropped to its lowest point on October 9, 2002 and that was a 37.8% decline from its peak.
There is a lot to swallow from the September 11th terror attacks. Although I was very young and did not fully understand what was happening at the time, I witnessed the emotions and financial burdens this caused to my family and to others. Now that I am older, I look back at September 11 and realize how vulnerable we really are and how terrified I’d be if something like were to occur again.
This one hits home for me and I’ll explain why in a bit. The housing crisis is a complex situation, so I’ll explain it at a high level. Home prices in the 2000s were skyrocketing and it made the mortgage business and purchasing a home very attractive. Not one party is to blame for the crisis as it was caused by several stakeholders.
First, homeowners were living large with their homes. They had so much equity that many borrowed against their homes for other investments, second homes, or to spend the cash. All very risky moves. At the time, purchasing a home was fairly simple and many applicants provided misinformation about their income and other financial data. But this wasn’t a concern because mortgage brokers and banks were promoting mortgage approvals with very little to no documentation and were not scrutinizing applicants.
On the other side of the coin, hedge funds, banks and insurance companies were making large bets on mortgage portfolios. These investments were even made on people with low credit scores and with little to no financial documentation.
Unfortunately, home prices began to fall in 2006 and the Federal Reserve raised the fed funds rate and it sent adjustable mortgage interest rates skyrocketing. Homeowners who bought more home than they should have consequently could not afford the monthly payments and they were left with very few choices. Their choices were to wait for the bank to foreclose on the home, renegotiate the loan, default on the home, or cut their expenses/increase your income.
This crisis caused havoc in the financial industry because banks were attempting to reduce their risk and exposure, but they were not lending to each other or to consumers and businesses. Cash flow was impacted because mortgages were defaulting left and right and when there is no cash coming in, we know what happens. The economy crashed.
As you may recall, IndyMac was the 7th largest mortgage originator in the US and it failed on July 12, 2008. Then, Lehman Brothers filed for bankruptcy on September 15, 2008, but the US government let them fail. Unfortunately, this impacted the entire global economy. During this time the United States lost more than 7.5 million jobs and Americans lost a collective $16 trillion of net worth as a result of the stock market plummet.
Wow. Just writing all of this gets me overwhelmed. Clearly, the early 2000s were not the brightest years in our country and for the economy.
How it all impacted me
I gave this high level run down of history because it serves as reminder for all of us and, more importantly, we should all learn from our history and the trials and tribulations we endured.
In between these 3 economic crises was the downward spiral for my family’s finances. More specifically, the housing crisis was our Achilles heel. My father made a lot of financial choices that reduced the liquidity of his assets because he utilized his cash to make real estate investments in the US and in the Caribbean.
Truth be told, we were living way above our means! The multi-million dollar condo in Florida, the real estate properties in NY, and the dozens of properties and homes in the Caribbean looked great on paper, but were completely unnecessary. The level of risk in our family’s finances was so great it was borderline negligent.
When the housing bubble popped, my father’s equity and net worth depleted very quickly. So fast that we defaulted on our primary residence and on practically everything else. I’ve got to admit, this was the only time in my life I’ve ever seen my father so clueless and helpless. It’s a moment that has scarred me. I grew up telling myself I’d never want to experience that from the perspective of a husband and hopefully a future father.
Since the cash was tied up in alternative assets, like real estate and other forms, there was no emergency fund, no cash to maintain obligations, and it was very hard to reduce our expenses. Our biggest living expense was the ridiculous mortgage and the only way to reduce it was to find a cheaper home. So, we did. We literally packed up our things and ditched our primary residence. We abandoned our home and defaulted. That’s when I knew that shit really hit the fan for us.
Over the next 2 years, we moved 3 times. Every single time, we searched for a more affordable rent and a smaller place to live. Every new move was a frightening moment for me and it was a harder punch to the gut for my family.
What I’ve learned from it all
Many of you may have a similar story and may have felt the same pain as I did. It’s not easy to see your life crumble right in front of you and witnessing your parents trying to remain calm and to reassure you that everything will be OK.
This may seem odd, but I’m grateful for this tragedy and for the experience this brought to me. It humbled me. It gave me perspective. It has taught me a lesson that no history book can offer me.
It has influenced me so much, that my biggest fear in life is to deliver bad news to my family as my father once did with us. I can only imagine how he felt at that moment and I don’t blame him for the financial tribulations we experienced. He did the best he could. But, there is a lot to learn from it.
History provides valuable lessons and from these facts we need to equip ourselves with the right attitude and strategies for our journey into the future. From my personal experience from these 3 economic crises, I live by these simple financial rules and I encourage you to do the same:
- Live below your means
- Have a minimum 6 months of income in an emergency fund (use a high yield savings account)
- Make it a priority to be debt free
- Strike the right balance of liquidity in your financial portfolio. Don’t make the same mistake as my family did by committing all of their cash to real estate assets.
Truth is, we can never be fully prepared for an economic crisis and we never know when the next one will strike. However, I’d rather be as prepared as possible for the hurdles life so often brings.