I just read an article from Fidelity – Lessons from the financial crisis, and it made some interest points. It’s been five years since the Global Financial Crisis and the stock market has come a long way since then. The average 401(k) balance for pre-retirees at Fidelity nearly doubled from $93,000 to $165,200. Most of us have learned valuable lessons from the financial crisis and we are much more prepared financially than five years ago.
Here are the key findings from Fidelity’s Five Years Later study. Investors have taken positive and permanent steps with their finances and are feeling more confident.
- Investors are increasing their annual retirement contribution. I’ve been saying all along that increasing your saving rate is even more important than maximizing the rate of return. When you’re starting out you really need to increase your saving rate as much as you can each year.
- Reducing their debt loads compared to five years ago. Pretty easy one. Less consumer debt is obviously better for your personal finance.
- Starting or building up emergency savings funds. Another basic step to strengthen your finance. Everyone should have some money in their basic saving account.
- Searching for guaranteed income options. This one is more important to people who are getting close to retirement. When you’re young, you can take more chances, but when you’re near retirement, it’s all about protecting what you’ve got.
These are all great ways to build wealth and prepare for retirement. We really should have been more prepared all along, but sometime it takes a jolt to kick us out of our doldrums.
Actually, I think it’s better to go through some financial setbacks when you’re young. You will have plenty of time to recover and learn from them. Have you been through a financial crisis? Did it make you stronger or did they set you on a downward spiral?
RB40’s financial setbacks
Actually, we haven’t had many financial setbacks recently. Our finance has been pretty stable for a long time and it’s quite nice. The Great Recession barely affected us at all. We already maxed out our annual retirement contribution. We had an emergency fund and we didn’t have any consumer debt. We were already prepared for a setback and kept investing through the downturn. Let’s look back further to see what other financial problems I had when I was younger.
My family immigrated to the US when I was 12. My dad’s electronic store business had failed in Thailand and he moved here with less than $1,000 in his pocket. It was a tough adjustment because my parents couldn’t get a professional job (My mom was a professor in Thailand). Eventually my parents saved up enough to buy a Thai restaurant and our financial outlook improved.
During those years, money was always tight and everyone in the family knew we needed to make every penny count. We rarely ate out. Our main entertainment was watching movies on the TV, reading books from the library, and just playing outdoors. Those frugal days are still a big influence and I know it’s possible to have a happy family without a lot of money. These days, we live a more comfortably frugal lifestyle, but we can ratchet back more if we need to. Mrs. RB40’s family also went through some early struggles and she grew up with a frugal lifestyle also.
Dot Com Bubble
I got my first engineering job in 1996 and started investing right away. My dad convinced me to invest in the 401k and I also had a little extra left to invest in the stock market. By 1999, I was leveraging and trading on margin. Of course, we know how that turned out. Tech stocks dropped like a rock and my portfolio was down more than 50%. It was tough at the time, but now that I look back it was a good learning experience for me. I learned quite a few things from that downturn.
- Don’t trade on margin. I’m not good enough to do that.
- Diversify. I had a significant portion of my net worth invested in the company I worked at. Now I’m much more diversified.
- Don’t stop investing. I guess I was pretty bullheaded and I kept investing through the downturn. Many tech stocks never recovered, but the stock market as a whole did. Many of my friends stopped investing in the stock market and never profited from the recovery.
- Make sure you’re cash flow positive. I had a good job and a steady pay check. The reduction in net worth was emotionally painful, but it didn’t change our lifestyle. We lived within our means and didn’t lose much sleep over the stock market crash.
- Stock options are worthless. I had a bunch of stock options that turned out to be worthless. At the height of the dot com boom, I had nearly $100,000 in funny money! Those options weren’t redeemable until after the bubble popped so I shouldn’t have gotten excited over them.
As I mentioned above, my portfolio decreased by over 50%, but in dollar amount, it really wasn’t that significant in the grand scheme of things. My portfolio probably lost around $25,000. That seemed like a lot of money back then, but it’s not a huge deal now.
Housing Bubble and Financial Crisis
I don’t think we had much financial problems from the dot com bust until the financial crisis. I was making good money and we lived within our means. We always had positive cash flow and regularly funded our retirement account.
We were somewhat ready for the financial crisis and came out pretty well five years later. We had some bumps, but nothing heart stopping.
- Purchased our condo in 2007 near the height of the housing market. Our condo price still hasn’t recovered. I added 2 more properties to our portfolio near the bottom of the market, though. Overall, we are ahead on the real estate front.
- Baby in 2011. We had a kid which was a radical change in our lifestyle. Daycare was very expensive. I didn’t like paying that bill at all.
- Quit my engineering career in 2012. My job became too stressful and I left to become a stay at home dad/blogger. Luckily, Mrs. RB40 kept her job and we still had positive cash flow once I left a regular paycheck behind.
What doesn’t kill us makes us stronger
Now that I look back on my personal finance over the years, I guess I was lucky that I knew how to be frugal. Not having a lot of money when we were growing up gave us the incentive to keep our lifestyle in check. The other setbacks are quite minor and we learned from them. It would be much more difficult to deal with those problems if we were 65. We’d have less time to recover from the financial crisis and we’d have to withdraw at the bottom of the market.
What about you? Have you gone through any financial setbacks and did they make you stronger?
See Mr. Utopia’s guest post about his setbacks – How Financial Setbacks Took A Toll on My Retirement Saving.
Photo credit: Wikipedia financial crisis of 1884
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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