Wow! It all seems so surreal. It’s kind of like watching a bad (or any) episode of Flavor of Love; we’re just waiting for the next train wreck to happen. But unfortunately it’s not a dream, it is the living drama that is the Nightmare on Wall Street, 2008 edition.
If I told you last year at this time that the following organizations would cease to exist as we know them: Countrywide, Bear Stearns, Indy Mac Bank, Washington Mutual, Fannie Mae, Freddie Mac, AIG, Lehman Brothers and Wachovia you probably would have thought I was a St. Lunatic. As it turns out, that is exactly what happened and now a gaggle of formerly high flying investment bankers have gambled their way out of their jobs. Looks like there will be a flood of applications for I Want to Work for Diddy, Season 2.
So how did we get here? Well in short, we bought a bunch of houses that we couldn’t afford with money that the bank lent but couldn’t afford to lose, which was “insured” by another bank that couldn’t afford to pay up if something went wrong. Get it? Ok, let me explain it in another way.
Let’s say you let Tim borrow 500 bucks. You know you probably shouldn’t because Tim’s Cricket is always off for a few days at the beginning of the month, but he agrees to pay you back with a high rate of interest. You could use the extra money so you agree.
As you begin to realize how bad of a decision you just made, you talk it over with your good friend Trish. Trish thinks you are overreacting, but makes a bet with you, “Give me 20 bucks now and I’ll pay you what Tim owes you if he comes up short.” You think, “Wow, Trish doesn’t know Tim very well, but if she is willing to State Farm me against my potential losses let’s do it!”
The time comes to collect on the loan and, you guessed it, Tim’s Cricket is out of service and he is no where to be found. When you go to Trish to collect on your insurance, you find that while she always looks good and has her hair and nails done, she never had the 500 in the first place to cover you against deadbeat Tim. How do you think she always has her hair and nails done? You realize that you just got royally f’d by both Tim and Trish. Certainly not the kind of ménage a trois you had always fantasized about, huh? Welcome to the world of high finance!
Because of this fast paced wheeling and dealing, we’ve all been subjected to watching the stock market go up and down more than Kim Kardashian after a Saints victory (or loss or tie for that matter). But if we take a step back from the chaos, we can learn a lot from this situation. Here are 5 lessons that we should take away from this year’s financial meltdown:
Show Concern, Don’t Panic: It shouldn’t take a global financial crisis to make you realize that you need to pay more attention to what you are doing with your money. Sure, things are tough right now and it is difficult to read the paper or watch CNBC without freaking out, but you should also realize that the government has taken unprecedented steps (whether you agree with them or not) to avoid this becoming the second great depression. The biggest safety net for you? Your cash deposits and money market funds are protected up to $250,000.
Keep Saving: A lot of people are thinking of taking money out of their 401k plans and other investments. Hey, if you’re going to lose all of your money anyway, you might as well go to Vegas and have fun with it right? Wrong. Taking all of your money out at the bottom of the market is like putting on your seat belt right after you crash into the pole, it’s not terribly helpful. Learn from your mistakes so that you will be better prepared the next time.
Pay Your Bills: The days of the easy money are likely over. When things settle down, it is going to be a lot harder for financially unstable people to get loans. Now is the time to protect your credit rating by making sure that you pay your bills on time. You’ll want to be on the right side of the fence when the standards get tighter and you want to lease a new vehicle or buy a home, which brings me to…
Don’t Buy What You Can’t Afford: Even if some fool is willing to lend you the money to buy something, make sure you can pay the note now and in the future. This applies especially to big ticket items like your home. Even multimillionaire superstars like Ed McMahon and Evander Holyfield have had their homes foreclosed on in the last year. The size of your income is not as important as the manner in which you manage what you have.
When All Else Fails, Marry Madonna: Apparently pre nuptial agreements are really out of style. You would think that news of Michael Jordan’s, Bob Johnson’s, and Paul McCartney’s eye popping divorce settlements would strike fear into the hearts of any would-be celebrity bride or groom. But no, Madonna’s soon-to-be ex husband will reportedly walk away with about $60 million as a part of their divorce settlement. Not bad for 7 and a half years of work. With the right attitude and a little luck, you too can give up a few years of your life for your share of a fortune that you did nothing to help create.
As a matter of fact, I am going to take my own advice. Anyone have Oprah’s email address?
Rob Wilson is a financial advisor at a major national financial services company. Don’t worry, it’s one of the firms that hasn’t suffered a catastrophic bankruptcy in the last few months. He can be reached at bigchipsblog@gmail.com with your financial questions and comments.