The Secret of Dealing with the Financial Crisis

by David Ning · 23 comments

More often than not, our view of (rather than the situation itself) dictate our state of mind. Some people would still be happy even if the world came crashing down.  For others, a minor setback would spark off a downward spiral of deeper sadness.  New circumstances are thrown at us day in and day out.  We can either make the best of it or make it worst.  It is up to us.

The Danger of the Trusted News

Lately, we hear lots of stuff over the news:

  • We are in the worst economic environment in decades
  • Everyone is losing jobs.  Look at that employment number at 7.2%.
  • All banks are failing, what should we do?

The unemployment number is climbing and it’s never good when this happens, but the unemployment number was at 5.8% in 2005 (Bureau of Labor Stats).  Putting it into context, this means that less than 2 people were laid off for every 200 people we know on average.

Is it worst than it was in 2005?  Absolutely.  Is it really Armageddon?  Hardly.

Our Expectation is Sometimes Just Too High

What about our net worth that came crashing down?

more of same

Whether it’s our stock holdings, our house value or our spending power, this chart pretty much sums it all up.  I bet a few years ago when your house or stock went to crazy highs (somewhere around the red line), you were extremely happy.

The value of your asset went down rapidly the past few months.  So did mine.  In fact, if this chart illustrates the value of the asset, it went down 50% off its highs.  It hurts to see it but other than our ego, did it change things that much?  Going back to our example, isn’t it just back to the value it was a few years ago?  The exact same level when we were celebrating?

The Real Danger

standard of living

Some of us got into trouble because of how we handled our new found wealth.  As our asset value rose, we began to increase our standard of living.  Each time our stocks went up, we poured in more material to build another step.  Now that the new money has stopped, so did the ability to continue building.  For some, it has gotten so bad that their standard of living fell off a cliff as their money supply dried up.

For those that lived life just the same, what really changed?

What is Your View?

There are certainly many people who are in trouble now but they are just the minority.  Unfortunately, most of us are spooked by the reporting on those suffering.  We are afraid because of the over-exaggerated news articles; we are frighten by what could (but is unlikely) to happen and we are worried that the sky is really falling.

But is it that bad?  Do you really have to be afraid and how likely is the worst going to happen?

Answer those questions truthfully and perhaps the rest of you day will be much brighter.

Have a Great One.

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{ 23 comments… read them below or add one }

ObliviousInvestor January 30, 2009 at 6:22 am

Well said. About 2/100 people are now unemployed who weren’t before. They have legitimate reason to complain (as well as the others who were already unemployed). The rest of us…

I think many of us have been living with false expectations for a long time (never-ending asset value increases, the ability to ongoingly spend more than we earn, etc.). This adjustment was bound to happen sooner or later.

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tom January 30, 2009 at 10:22 am

It is time for the economy to change, invest in new industries such as clean energy.

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VM January 30, 2009 at 11:07 am

I want to pose the question as to why the ones who lost their jobs can ‘legitimately’ complain? I am not insinuating that I would be at all happy about it, mind you. I think we as a whole have been raised/educated to study hard, do well in college, get a good job, live well and buy all those things that you ‘need’ in life so badly. It seems that no one is encouraging the next generation to be diverse or even well-read in anything BUT their chosen field, and heaven forbid – their own finances. (We as parents can and should fill-in those gaps) I know I am teaching my kids to be handy/smart/intelligent in many fields of life/business, so that when and if a lay-off or any other disaster ever happens to them, they can bounce right back up and get another job without a worry or hitch. (Of course they would hopefully have their 3-6 months cash in reserve) Sure, it may not be the exact field or job they would like the most, but they are able to simply move on. Their standard of living may even have to lessen for a while, but they will know that it is not the end of the world. Living in fear is no way to live. We need to teach and encourage our youth to be ready and prepared for any setbacks, not to complain and to especially be unafraid of them.

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ObliviousInvestor January 30, 2009 at 11:13 am

Hi VM.

I agree with you that it’s important to instill a sense of independent and can-do sort of attitude in people.

At the same time, I’d say that a person who (in your words)
1. Has their standard of living lowered,
2. Has to burn through 3-6 months emergency fund cash, and
3. Ends up taking a job that isn’t in the field they want to work in

….has a right to complain a little.

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Neal Frankle January 30, 2009 at 11:50 am

This is a great post and so important. Thanks for this.

In addition to your ideas, I also notice that our feelings – have little to do with our objective situation and more to do with the direction of where we are headed.

My income and net worth is lower….absolutely. Is my family going hungry? Are we homeless? Nope. Looking at this from 20,000 feet, most of us have less – that’s true. But has our lives been materially impacted? Probably not.

Thanks.

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marci January 30, 2009 at 1:00 pm

Be versatile, adaptable, frugal, learn to do it yourself, and grow a garden…. then the world is yours. Yes, I think a lot of it has to do with one’s attitude. Some people tend to focus on the value (numbers), and not the tangible asset…. I still have the same house and the same number of stocks ; value may have changed but the tangible asset itself has not. Therefore, I chose to NOT feel a loss and am happy with the tangible.

I liked your graphs – especially the redline…. Exactly what I think about the situation – the ‘values’ got artificially inflated and now are back to a more realistic level.

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Craig January 30, 2009 at 1:04 pm

I agree that the situation is bad, and economy is bad, but don’t go crazy over it. It’s not the end of the world as the news sometimes makes it out to be. The news strives on negative stories. Ryan at my blog wrote a similar post if you would like to read more about it. http://blog.budgetpulse.com/2009/01/23/be-aware-but-dont-get-carried-away/

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Moneymonk January 30, 2009 at 1:54 pm

I think the media take thing wayyyyyyyy out of proportion

93% Americans are still employed

97% of homeowners pay their mortages on time.

They always look at the raw number 3 million foreclosures……. But never will you hear them say that’s only 2-3% of the entire housing industry

I lived that same ways I lived years ago if not better. I do not choose to participate in the recession

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marci January 30, 2009 at 2:04 pm

@moneymonk – I like your statement “I do not choose to participate in the recession.” :) Neither do I. In fact, this week I bought myself a nice 2004
extended cab pickup to replace my 35 year old datsun pickup. An almost new low mileage truck for less than 1/3 the price of a new one. Good deals out there right now. I’d been looking for a newer truck for 3 years, just waiting for the right deal to come along. Cash of course tho :)

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Chiko February 1, 2009 at 10:25 am

I agree that it’s all in how you look at things. This is exactly why I stay away from the idiot box (the TV) because it’s always trying to have you believe a certain way. For the past few months the only thing you hear is how bad the economy is, but is really that bad? They are making it seems a lot worst then it is. For example, I just graduated from college three weeks ago with an undergraduate degree and was able to find a job as a health care recruiter right away. Now, if the economy was really that bad all around us, would that have been possible?

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BettyLaVerne October 7, 2010 at 9:02 am

One point is that today, the very poor have government services, but the working poor have no protection. For example, if you have bad credit today, you can not even get an apt., but those who are not working can get section 8 , for free. And, they get their food etc. We really have to change the way we treat those who are working , but at low incomes, verses those who are not working, by choice in this country. We are supporting higher rents with section 8 users, since landlords can depend on the government money better than on the working poor, who sometimes change or lose their jobs.

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J Ellis January 14, 2011 at 10:59 pm

Well, no, it’s not possible to get Section 8 in most metro areas at all… there have been suspensions against the issuance of new vouchers in place for at least 8-10 years in most urban areas (which is where most poor people are, at least those who need assistance vs. who have family to fall back on). Most people (not seniors) who qualify for Section 8 ARE working. It’s rare to qualify if no one in the household is working at all… that’s what public housing is for, the poorest of the poor, and it’s a very different concept and reality than Section 8.

The whole point of vouchers is to deconcentrate poverty and to give working families a chance to get to better neighborhoods with better schools and better jobs so they can improve their lives and their children’s lives, so yes, of course it supports higher rents. I’d rather pay a decent landlord a decent rent and give a family a chance to improve, than keep that family in substandard housing that is overcrowded and unsanitary but happens to cost $500 per month instead of $1,100, wouldn’t you? It’s also not exactly free; families are subject to annual recertification and go through a humiliating and invasive annual examination that I would never tolerate even in exchange for reduced rent, and that’s after they spend 10 years on some waiting list desperate for housing assistance.

Also you don’t have to be rich to have good credit; credit is not really about how much cash you have. (Although in theory it should be easier for a wealthy person to have good credit.)

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kitty February 1, 2009 at 5:36 pm

Very interesting post with some very good points. Yes, while our savings are down – and the more money you have the more money you likely to have lost – but most people aren’t starving. This is a good thing. 7.5% is not that much (unless you are the one unemployed). The foreclosures rate isn’t as high.

But.. Regarding unemployment: a) a lot of people believe this number is underreported b) some areas – like NY – are hit a lot more than others. As to mortgages – I think a lot of posters here still don’t understand how the mortgage-backed securities and credit default swaps amplify mortgage losses exponentially and how the loss in paper value of these securities lead to the credit crisis.

The main thing I think people are unhappy is because they are worried that it’ll get a lot worse before it gets better. Some of it may be due to a lot of gloom and doom on TV, but some is due to legitimate concerns about a) continued credit crisis with businesses across the board having liquidity issues b) continued bank losses as not all CDOs have been completely devalued yet c) lack of spending that may not be so bad for a person involved (especially if the person is in debt) but is likely to lead to further contraction in the economy, then to more lay offs and to even less spending i.e. a deflationary cycle d) growing government debt e) massive money printing that may cause inflation when the economy finally picks up. c) and e) are working against each other as one is deflationary and another may lead to inflation, but this is part of the problem – we don’t really know what will happen next. This uncertainty and fear is the largest problem: many people are scared in hoarding money rather than spending.

@VM: The problem is that in some areas it is really difficult to find a job nowadays and your 3-6 months emergency fund is grossly inadequate in this case. Take, for example NY. I have friends – mostly in IT and software R&D, and they find it really difficult to find jobs. I know really good people – excellent engineers and scientists – who have just lost their job when my employer had a round of layoffs – 2 days after excellent earnings. The scary thing was that nobodycan understand the principle by which these people were chosen which means virtually every remaining employee (myself included) is asking “why him and not me” and is scared like hell. I know some people who worked in NYC in IT – programmers, DBAs, who cannot find a job since last summer. These aren’t stupid people or lazy people or people with bad interview skills – these are highly skilled, experienced people who in the past had no trouble finding jobs. But virtually nobody in and around NYC is hiring. 3-6 months emergency fund? Forget it. You need at least an year, if not more. You also need to allow for buying medical insurance which is actually the main reason my friends are worried since they do have a lot more than 3-6 months emergency fund. Even Cobra is expensive.

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Spartan Saving February 1, 2009 at 6:39 pm

I think a big fear is the fear of the unexpected, the what if’s. While during the past years there was always the what if I get laid off but since it happened randomly and to relativly few people it wasn’t a worry. Now a days with company’s laying off 1000’s of people a week that fear exists and it’s becoming more and more justified.

Say you got laid off 5 years ago, okay it sucks but you still have a house in a good market. You could get a loan, your debts were lower, you had less debt then now probably and plus your savings accounts were doing well.

Today if you lose your job, there are not many jobs out there anymore, there are more people competing for jobs, the value of your house is down, it’s harder to get a loan, your savings account has been ripped to shreds and it goes on.

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jl February 2, 2009 at 1:40 pm

I am likely to lose my job in a month. I took a 20% pay cut to keep it this month. My mortgage is the same, sure, but my ability to pay it has changed. I thought I was doing everything right.

I have 5 months of living expenses saved and no other debt. I have plenty of equity, but now I’m trying to tap into it to cushion my savings. I thought I’d have this house paid for in 8 years. Now I’m looking at 30 years again since I need that equity to live on and to lower my monthly payment while I look for work. My situation is better than many, but I’m still bitter at being back where I was 10 years ago.

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Truck trader February 2, 2009 at 10:24 pm

the unemployment rate is increasing day by day but this to few companies this stage is very beneficial at the same time ….

many are out of work from their companies … and i too have a frd who is haven’t paid since 2 months but instead of leaving the job he is still working hard to keep his company running … lets hope for the best.

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tom February 3, 2009 at 9:39 am

People need to stop complaining because they are the ones who followed others blindly into buying houses and cars they could not afford, period.

Does it make sense on a 50k or 100K household income to buy a 300k+ house and 30K car while you are barely making it by each month?
What are you gonna do when shit happens? No savings, so you lose your house and your, and you wonder why your kids think you’re dumb and your wife divorces you?

Do you people ever really think about what the are doing, or do they just follow the herd?

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fathersez February 4, 2009 at 3:25 am

A very interesting way of laying it as it is.

Live by the sword and die by the sword, except the sword was allowed into our daily lives through the often ruthless advertising done by the companies.

I am having my share of knocks from this down market (writing from Malaysia by the way) and and still working to find my feet. At least we have a roof over over heads and food on the table.

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Wil Possible December 9, 2010 at 4:12 pm

I love your illustrations. If a picture is worth a thousand words, your pics are definitely it.

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John January 22, 2011 at 11:29 am

Hello there,

I don’t know if I can comment here (I don’t live in the States. I live in Spain). I just wanted to express my opinion.

First of all, I think this blog is really good. It is so true what you say about the press blowing everything out of proportion. I think a lot of people (myself included.) get totally freaked out about what might happen. The newspapers know this, and use it to sell stories. It’s a real psychological pull that, unfortunately, only seems to be getting worse.

However, I don’t think it’s completely fair to blame the average person. Businesses and banks have been ruthlessly cruel. In recent years there have many workers who have come to Spain from South America, sold an idea of a country paved with gold. Many of these people haven’t had a full education. Some don’t even know how to read or write.

Many banks knowingly took advantage of these people. They sold them houses even when they knew that these workers couldn’t read, let alone understand the legal, technical jargon on the contract. I know this because I knew somebody who worked in a bank. He ended up leaving because he just couldn’t take it anymore. When the construction industry went bust here, and lots of immigrants started losing their jobs, they started going to the bank and saying they couldn’t pay. But in Spain you have to keep paying your mortgage, even after the bank has repossessed it.

Although I think people need to know their limits, of what they can and can’t afford, not everyone has had a decent education. The banks and businesses who lied to ordinary, working people should be held to account.

I have a job. I guess I do okay, but I will never be able to afford a house. I will never be able to splash out on a fancy holiday. I have come to accept that I am a member of the working poor. It’s a term I just recently discovered, one that unfortunately, describes many people’s situation perfectly.

All the best,

John.

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Phertz1 July 17, 2012 at 3:13 pm

Well now it is the middle of 2012 and things have gotten worse. First, in those replies from 2009 they complain about 7.2% unemployment, it is now far worse. There is a huge underemployment and even worse a large number who gave up seeking employment. We now find 50% of the people pay no income tax at all. Many file to get tax credit benefits like earned income benefit.
Huge numbers are on social security disability who are not of retirement age. I filed for social security and there were over 80 in line when it opened. Guess how many were there to file for social security retirement benefits? FIVE. The rest were there to prove or collect on disability insurance. Now we have Obamacare, but we have a multi trillion dollar debt and trillion dollar deficit. Can we afford Obamacare? No one knows but it is the law of the land!
Things are not always as they seem. Most people only listen to the sound bite, and go no further for their info.

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Alma Lin October 11, 2012 at 3:48 pm

Every job is risky. Be self-employed and rely on your skills to earn instead.

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Phil Maguire November 26, 2013 at 5:50 am

I don’t wish to sound negative but this article is a bit lame – especially as it is in a section called “Beyond Money”

If you measure you life and your success in terms of money, these events are a disaster.

If you understand that 95-97% of the money supply is debt money therefore it makes a useless measure for you continued security and well-being so you need to build something of real value for the long-term, these events become irrelevant.

Personally, I think these events are a god-send because they have woken people up to the fact that money makes a great medium for exchange but it must never become our master

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