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Financial Setbacks Can Strengthen Your Finances

by retirebyforty on March 31, 2014 · 31 comments

in financial independence, frugal lifestyle, money mistakes

financial crisis can make you stronger

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.

Teen years

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

{ 31 comments… read them below or add one }

John C @ Action Economics March 31, 2014 at 5:11 am

My largest financial setback happened a little over 5 years ago. Several of my friends who were older and more established in life invested in real estate and I wanted to join the club too. I was 22, we barely had enough cash to qualify as what today I know as “an emergency fund”, and my son was just born. There was a house in disrepair a couple blocks down from my mother in laws house that went up for tax auction. I bought it for $6,000 thinking “$6,000 for a house? I can’t loose!” Boy was I wrong. I didn’t have enough cash built up for the repairs, the extra tax bills, everything cost more than I anticipated, there were some extra surprises, and I just didn’t have the time to mess with it. I ended up loosing over $6,000 on a $6,000 house. This experience was an expensive lesson, but it taught me a lot about “risk management”.

I agree with you on your conclusion, I think growing up living a frugal lifestyle makes a big difference in adulthood. My parents had us young in life and struggled in the beginning, by the time I graduated high school they were in a very good financial position. If I had only seen the “good times” I think I would have had a bit of culture shock upon entering the real world.

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retirebyforty March 31, 2014 at 10:10 am

Wow, that’s interesting. Did you sell the place and make some money back? It’s still not a huge loss and you learn a lot from that experience. That’s why we have to invest and try different things while we’re young. Thanks for sharing.

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John C @ Action Economics March 31, 2014 at 11:27 am

Yeah when I sold it is when I “realized the loss” What I learned from it was probably worth the money, but at the time it certainly didn’t feel that way! Your article got my gears turning on the whole scenario, so I wrote an article covering the details on my site.

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Justin @ Root of Good March 31, 2014 at 7:34 am

As adults, we have been lucky to never have any financial setbacks like you had as a kid when you immigrated from Thailand. We did “suffer” through the 2008-09 Great Recession, so I know what it’s like to lose a lot of money month after month after month. It made me more conscious of the realities of risk, but not necessarily more risk averse. It did motivate us to focus on paying off the mortgage instead of carrying most of a 30 year mortgage into retirement.

Mrs. Root of Good immigrated here with her family when she was 7 (also from Thailand), and they started with the shirts on their back plus some donations from their sponsors here in the US. Needless to say, they led a fairly austere existence for the first decade or so. It definitely made her more frugal long term, since she knew it didn’t take that much to entertain yourself and have a fun time. As she says, sticks and rocks and rubber bans were the play toys available to her and her siblings in Thailand.

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retirebyforty March 31, 2014 at 10:22 am

Yeah, kids have way too much toys these days. That’s why I don’t want to be too wealthy, you know. I don’t want the kid to live such a cushy life. :)
We’ll keep a moderate lifestyle and make sure the kid appreciate it. Thanks for sharing.

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Stefanie @ The Broke and Beautiful Life March 31, 2014 at 8:10 am

I find that all setbacks have a lesson associated with them. But you also have to be willing to learn the lesson and apply it going forward (which is I think where a lot of people fail).

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Tom @ Finance and Flip Flops March 31, 2014 at 8:51 am

I’m curious, fidelity claims the average 401(k) balance for pre-retirees nearly doubled from $93,000 to $165,200. But how much of that balance increase is due to the market rebounding in the past 5 years rather than savings rates going up?

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retirebyforty March 31, 2014 at 10:23 am

It’s both. They said the saving rate went up a little bit, 2-3%? It’s still better than before so that’s good.

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Jamie V March 31, 2014 at 10:29 am

I haven’t experienced any serious financial setbacks myself, though I do know that everyone has them…and they are coming for me, because it’s far past my turn for it. :) I’m trying to not be afraid of when “it” hits, and am getting my emergency fund and retirement funds built up, so when that possible something does happen, the hit can be as minimal as it can be. I guess I’m lucky I can learn from everyone else around me!

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retirebyforty March 31, 2014 at 3:19 pm

Get it out of the way while you’re young. :) Or maybe you will have a charmed life, nice.

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Mom @ Three is Plenty March 31, 2014 at 10:32 am

I’ve been lucky enough to never have a major financial set back – at least one that seriously affected me. There have been some – like unexpected repairs on the house, and selling my townhouse – that I’d rather not go through again though. I just wasn’t able to spend the money the way *I* wanted vs how *life* wanted me to spend it.

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retirebyforty March 31, 2014 at 3:20 pm

That’s nice too. We haven’t had too much trouble recently and I like it. Life is so much easier when you’re prepared.

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davidmichael March 31, 2014 at 10:44 am

Joe…thanks for sharing your personal financial history. It’s a great American immigrant success story.

In teaching many students in community college from all walks of life, I found that by the third generation, many of my students had unlearned the lessons of their grandparents and great-grandparents. They were as American with typical American problems as all the other kids. In other words: in debt, living beyond their means, lacking the incentives to work and study hard, trying to keep up with their neighbors, etc, etc. Something to keep in mind for your kids and grandkids and great grandkids.

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retirebyforty March 31, 2014 at 3:21 pm

Thanks for sharing your experience. I will try to keep our kid grounded. That’s one reason why I don’t want to get too wealthy, you know. :) We’ll try to spend more time in Thailand and other countries so the kid will see how the rest of the world live. Actually, Thailand is quite comfortable now.

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davidmichael March 31, 2014 at 11:01 am

I have suffered from several financial set-backs since I am older and have been retired for over 20 years. Among them, the crises of 1987, 2000, 2008. In fact, it seems there is a major recession in the USA every eight years or so.

The biggest mistake I made was thinking I could outplay the market by trading in stocks and options over 20 years plus. I lost 0ver $100,000 but most importantly, that money lost all chances of compounding and eventually losing the potential of $500,000 or more after 20-30 years. Buffet was and is exactly correct…invest for the long, long term when it comes to stocks.

One other mistake was to believe in the financial health of the insurance industry. My wife’s annuity company went bankrupt (largest insurance company of California) losing a promised $650,000 at retirement age of 65. If people learn one lesson on their way towards financial freedom, it is that nothing…nothing is guaranteed in this life. Prepare accordingly!

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retirebyforty March 31, 2014 at 3:23 pm

It seems like we are due for another one in a few years. Timing the market is really difficult. I have been buying and holding so we through the last one okay.

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peter March 31, 2014 at 11:54 am

I am not sure about frugal but I remember reading this about living below one’s means:

when you live below your means, you have savings,
when you have savings, you can maintain your lifestyle for longer if you’re between jobs
when you have savings, you have peace of mind
when you have savings, you can retire earlier
when you live below your means you can make do with lower rates of return
with lower rates of return on your savings, you need not take more risks
with lower risks, your savings last longer and your retirement is peaceful

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Andrew@LivingRichCheaply March 31, 2014 at 12:05 pm

I had a similar experience growing up…I’m a child of immigrant parents. I’m pretty sure frugality was ingrained in my head by them. When the internet bubble burst, I was still in college but invested all the money I had at the time in internet stocks. That didn’t end well. But fortunately, I wasn’t deterred and continued to invest after college when I had a job. I was able to take advantage of the bull market.

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retirebyforty March 31, 2014 at 3:24 pm

Thanks for sharing. I think everyone had money in internet stocks back then. At least you didn’t lose that much money since you didn’t have that much to begin with. :)

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jane savers @ solving the money puzzle March 31, 2014 at 2:12 pm

I had to start all over a decade ago when my marriage blew apart. I had to go in to debt to upgrade my skills to increase my income and some of my living expenses ended up on the HELOC because I just didn’t have enough money to make ends meet.

I let other expenses, like pizza, end up on the HELOC too and I am still paying it all off. In for a penny in for a pound is the old saying and I was in so much debt that I just didn’t care about adding little bits more.

I learned that I need to take steps to stop the problems before they get out of hand. Ignoring the problems doesn’t make them go away – it just makes them bigger.

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retirebyforty March 31, 2014 at 3:27 pm

That’s really tough, but you’re stronger and more independent now. It would have been much worse if the divorce is delayed 10 years… Thanks for sharing.

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Done by Forty March 31, 2014 at 5:24 pm

Interesting concept, Joe. We probably learn a lot more from the hard times than the good ones. Our first foray into investing had us lose quite a lot with a front-loaded mutual fund, purchased in a big lump sum, right at the start of 2008. We also learned about the risks associated with investing…the hard way.

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No Nonsense Landlord March 31, 2014 at 6:31 pm

I lost a bunch in the 2000 crash too. I found that RE was someting I was successful at. Probably because it is not readily trade-able. Even my 401K does great, as long as I leave it alone.

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IWRN March 31, 2014 at 10:26 pm

Hi Joe,

Thank you for sharing your stories. Believe or not, I am more interested in planning our retirement and am losing my interest in my current job. I truly enjoy our retirement planning even though we still have another 2 or 3 years till our retirement.

I fear financial setbacks after my wife and I retire. Especially, I am afraid of having such a financial disaster after we reach 60’s or 70’s. It will be extremely difficult to return to work at age 60+. To reduce financial risks and volatility, I prefer to diverse my investment into multiple areas (dividend stocks, ETFs, mutual funds, rental, bonds, gold, etc.). I want to ensure that we will have fixed income so that we will at least have some income stream during the economic downturn.

Here is a question for you. Many assume 8% annual return (on average) from security investment (stocks, bonds, ETFs, mutual funds, etc.). If I can gain 8% annual return, I will not worry about our retirement life. In my conservative opinion, the average annual return from security investment after retirement is more like 5% (maybe 6%). What is your opinion?

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Financial Samurai April 1, 2014 at 1:12 pm

Financial crisis was a doozy!

But I’m thankful it gave me the motivation to start FS.

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Bryce @ Save and Conquer April 1, 2014 at 2:50 pm

When I started my career job in 1985, I maximized my contributions to our retirement vehicle and have done that ever since. It started as a SEP IRA. After 10 years, I had a good amount of money saved despite the fact that I thought I could time the market and didn’t know enough to worry about costs. I did know that I wasn’t good enough to practice day trading, and that taxes and fees would eat you alive. By early 2000, I had built up $860k in my retirement account. Then the bottom fell out. By 2002, my retirement account only held $140k. Out of this disaster, I found investment books and articles teaching the Boglehead way of investing in low-cost passive index funds and staying the course. My wife and I have been very happy with the results. We felt the 2008 downturn, but were only down 20%. We are now multiples above what I had in 2000, and I have moved our asset allocation to a moderate 50/50 stocks/bonds position in preparation for retirement.

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retirebyforty April 1, 2014 at 11:39 pm

Thank you for sharing your experience. Wow, that’s a big drop in your retirement account in 2002. Yikes. At least you learned from it and now you are doing very well. 50/50 split sounds right in your position. You did much better in 2008, great job!

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Dividend Mantra April 1, 2014 at 6:41 pm

Joe,

I’ve always found when one door closes, another bigger and brighter door opens.

I remember I was laid off in early 2009, and when I found out how little control I had over my own income and life I vowed to change that. That led to me moving to Florida and everything I’ve done since. So setbacks can definitely strengthen you. Whatever doesn’t kill us only makes us stronger, right? :)

Best wishes.

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retirebyforty April 1, 2014 at 11:39 pm

Jason, that’s very optimistic of you. :) Thanks for sharing.

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Evan April 4, 2014 at 12:31 pm

Just saw a funny quote on the topic,

“Every 5 to 7 years people forget that every 5 to 7 years there is a recession”

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Abelardo Nery April 19, 2014 at 2:12 am

Invest young is the best advice. Capital earns a 10% raise a year on average, and labor only earns 3% a year on average. there was a really good article I read that stated that if you save 10k/year from the age 21 to 31 and stop contributing and compare it to another person saving the same 10k/per year amount from the age 32 to 72 that the person who contributed from 21 to 31 (10 years), will have always have greater amount than the person who save from 32 to 72 (40 years) or actually 1000 years to the future. I tested it out, as long as the market returns 7% a year, saving early will be greater. Markets on average generate 10% in total return. Assuming average returns, at the age of 72, the person who invested between 21 to 31 will be worth $8.4m vs $4.8m for the person who saved from 32 to 72. This is the power of compounding and capital markets.

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