Thursday, November 13, 2008

Financial Lessons from my Parents' Generation Re-Learned

My parents grew up during the Great Depression and the lessons they learned shaped their money management philosophies. My generation seemed to have forgotten these lessons. However, the financial crisis of 2008 is painfully providing us with the same lessons to be re-learned again.

  • There are no guarantees. Bull markets have made us complacent, causing expectations of a rosy future. How many times have we heard, " Based on historical average returns of 10% in the stock market..." ? The bear market of 2008 has made it clear every year does not deliver the average.

  • Avoid being over leveraged. Leverage can be destructive, especially in a down market. Use of excessive margin in the stock market contributed significantly to the crash of 1929 -1932. 30 to 1 leverage for CDOs contributed to the down fall of Bear Stearns and Lehman Brothers. No money down for overpriced houses are now leading to record foreclosures.

  • Build a financial buffer to get through tough times. No matter how little my dad earned, my mom always saved for that rainy day. Fortunately, my parents didn't have many financial crises and were able to use their savings as a down payment on a house or to purchase a car.
  • Optimistically, I expect this crisis will pass too, as did the Great Depression. However, I hope my children will remember and benefit from the lessons re-learned.

    For more on Crossing Generations, check back every Thursday for a new segment.

    This is not financial advice. Please consult a professional advisor.

    Copyright © 2008 Achievement Catalyst, LLC

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