I want to tell you a tale. It’s a personal tale and one that should give pause to those considering bankruptcy due to current financial difficulties.
I started in the investment business in 1981. I was young and broke, like most young people and I managed to gain a position as a municipal bond salesman at a decent firm working for “peanuts” plus commissions. As time went by and I got a little smarter and better at my job, I managed to raise my status and join a major brokerage firm.
My compensation at the new firm was $500 per week for 6 months and pure commission thereafter. I had never earned the “whopping” sum of $500 per week so I was very excited. Right at that time however, we had just finished paying off my wife’s mustard yellow Plymouth Volare (boy did I hate that car!) and on the way to the Chrysler dealership to buy a new one, there happened to be a BMW dealership on the way. So I said to my wife: “Let’s just go in and see what they have”. Sure enough, three hours later, we walked out with a beautiful lapis-blue BMW 526.
Little did I realize that after the new car smell wore off, the cost of the monthly payment would just be the beginning of my struggle to afford this car. Standard maintenance was $500 a shot and unfortunately the air conditioner kept leaking pushing me into poverty at every turn. I had no business buying a BMW earning $500/ week, but the salesman was good at his job and he figured out a way to get me into this car. I was like the sub-prime borrower buying a $500,000 house; I was buying well above my means. Maybe it was the salesman’s fault after all!
Luckily, I started doing a little better financially so I was able to keep up with all of this, but my life style started increasing as fast as my paychecks.
This went on until October 1, 1987. It was on that date that my wife and I decided to step up to a bigger house and mortgage. After all, my income had been getting larger along with the size of our family so it seemed like a good idea at the time. Unfortunately time was not on my side because exactly 17 days later, the stock market crashed, posting its largest decline since the depression– 22% or 500 points in one day!
This is when things started to get tough. It was my first experience with a bear market and investors were frozen with fear. My earnings slowed down considerably and the only way to keep up with my mounting obligations was to use whatever credit was available. So out came the credit cards and home loans. This went on for a few years and was not a pretty sight. Some of my colleagues were in the same boat, and a few of them decided to declare bankruptcy as a way of emerging from their problems. I considered it but was very hesitant. I didn’t know what the future ramifications would be, and I felt it was wrong to do it if I could find the wherewithal to pay my bills with the hope of a return to higher earnings as the situation improved. I believed in paying back what I owed.
The market, economy and my earnings eventually improved but it took a very long time to dig out of the hole I had dug for myself. To give you a small idea of how bad things got, I remember needing a new refrigerator but not having a spare dime. We went to Sears, filled out a credit application and sweated out the wait for approval. I didn’t know what I was going to do if I was declined. How would I live without a refrigerator? What had I gotten myself into? Thankfully, I wasn’t declined so the refrigerator was delivered the next day. What’s important about this experience, besides from the feeling of panic, was the fact that a year later, we sold our house and left the refrigerator to the new buyer. Incredibly, I hadn’t finished paying the refrigerator off, so I continued paying the bill for years, even though I was no longer using it.
Finally it dawned on me; (by that time I had studied and received my Certified Financial Planner designation) that the lesson to be learned from my trials was to understand the financial cycles that affected my life. I vowed that with the next economic upturn, I would not spend all of my money; I would start saving it for the next down cycle I knew would always come.
Finally with my bills paid off and extra money coming in the door, I built considerable cash and investment pile. I can only try to describe the profound impact that being ahead financially had on my life. My sense of security increased as well as my confidence and competence as a Financial Advisor. This was many, many years ago, but it was an important and hard won lesson which I carry over to this day-and it was a lesson which improved my life many times over.
So here’s an idea to help you learn the lesson which took me years to understand.
Divide your thinking into two ideas.
First, think about your personal financial cycle. Are things going well financially? Job secure? Money in the bank? Take a piece of paper and write the letter P for personal and an up-arrow next to it.
Next, think about the economy in general. Is it bad or good? If it’s good, across from the P -up arrow- on the same line or in a little box write, E -up arrow. E for economy. There are four possible combinations:
Personal:——————————— UP Economy:——————————— UP
Personal:——————————— UP Economy:——————————— DOWN
Personal:——————————— DOWN Economy:——————————— UP
Personal:——————————— DOWN Economy:——————————— DOWN
When your personal “P” is up, and the economy is up, save money for the inevitable down cycle.
When your personal “P” is up, and the economy is down, invest for the future
The worst case is Personal down and Economy down, because the two are inexorably tied together; i.e. out of a job (Personal) with jobs hard to find (Economy).
Remember the life of the farmer who is certain, as dark follows light, that winter will follow summer. He knows to save his extra harvest by canning or bottling it for the upcoming winter. This is the food which will enable him and his family to survive.
It is no different for us, just a little harder to see. Use my idea to simply chart the summer, spring, fall and winter of your personal financial life. Compare it to the economy as a whole and follow my aforementioned advice.
Oh and by the way, I decided to start my own business in 1996 to break away from the Brokerage business. When I applied to become a principal of my firm, a question on the form stood out like a sore thumb. “Have I ever declared bankruptcy”? Thank heaven my answer was no because the law does not allow one who has declared bankruptcy to operate a registered investment advisory company. My future would have been inexorably changed for the worse. This was one of the unexpected consequences that was not immediately apparent during those troubled times.
The lesson is clear. Be very careful, with big life decisions like declaring bankruptcy. While the reasons on the surface may sound valid and the path easy, you never really know the full ramifications of this type of action.
Click here to listen…
A Brush With Bankruptcy
I want to tell you a tale. It’s a personal tale and one that should give pause to those considering bankruptcy due to current financial difficulties.
I started in the investment business in 1981. I was young and broke, like most young people and I managed to gain a position as a municipal bond salesman at a decent firm working for “peanuts” plus commissions. As time went by and I got a little smarter and better at my job, I managed to raise my status and join a major brokerage firm.
My compensation at the new firm was $500 per week for 6 months and pure commission thereafter. I had never earned the “whopping” sum of $500 per week so I was very excited. Right at that time however, we had just finished paying off my wife’s mustard yellow Plymouth Volare (boy did I hate that car!) and on the way to the Chrysler dealership to buy a new one, there happened to be a BMW dealership on the way. So I said to my wife: “Let’s just go in and see what they have”. Sure enough, three hours later, we walked out with a beautiful lapis-blue BMW 526.
Little did I realize that after the new car smell wore off, the cost of the monthly payment would just be the beginning of my struggle to afford this car. Standard maintenance was $500 a shot and unfortunately the air conditioner kept leaking pushing me into poverty at every turn. I had no business buying a BMW earning $500/ week, but the salesman was good at his job and he figured out a way to get me into this car. I was like the sub-prime borrower buying a $500,000 house; I was buying well above my means. Maybe it was the salesman’s fault after all!
Luckily, I started doing a little better financially so I was able to keep up with all of this, but my life style started increasing as fast as my paychecks.
This went on until October 1, 1987. It was on that date that my wife and I decided to step up to a bigger house and mortgage. After all, my income had been getting larger along with the size of our family so it seemed like a good idea at the time. Unfortunately time was not on my side because exactly 17 days later, the stock market crashed, posting its largest decline since the depression– 22% or 500 points in one day!
This is when things started to get tough. It was my first experience with a bear market and investors were frozen with fear. My earnings slowed down considerably and the only way to keep up with my mounting obligations was to use whatever credit was available. So out came the credit cards and home loans. This went on for a few years and was not a pretty sight. Some of my colleagues were in the same boat, and a few of them decided to declare bankruptcy as a way of emerging from their problems. I considered it but was very hesitant. I didn’t know what the future ramifications would be, and I felt it was wrong to do it if I could find the wherewithal to pay my bills with the hope of a return to higher earnings as the situation improved. I believed in paying back what I owed.
The market, economy and my earnings eventually improved but it took a very long time to dig out of the hole I had dug for myself. To give you a small idea of how bad things got, I remember needing a new refrigerator but not having a spare dime. We went to Sears, filled out a credit application and sweated out the wait for approval. I didn’t know what I was going to do if I was declined. How would I live without a refrigerator? What had I gotten myself into? Thankfully, I wasn’t declined so the refrigerator was delivered the next day. What’s important about this experience, besides from the feeling of panic, was the fact that a year later, we sold our house and left the refrigerator to the new buyer. Incredibly, I hadn’t finished paying the refrigerator off, so I continued paying the bill for years, even though I was no longer using it.
Finally it dawned on me; (by that time I had studied and received my Certified Financial Planner designation) that the lesson to be learned from my trials was to understand the financial cycles that affected my life. I vowed that with the next economic upturn, I would not spend all of my money; I would start saving it for the next down cycle I knew would always come.
Finally with my bills paid off and extra money coming in the door, I built considerable cash and investment pile. I can only try to describe the profound impact that being ahead financially had on my life. My sense of security increased as well as my confidence and competence as a Financial Advisor. This was many, many years ago, but it was an important and hard won lesson which I carry over to this day-and it was a lesson which improved my life many times over.
So here’s an idea to help you learn the lesson which took me years to understand.
Divide your thinking into two ideas.
First, think about your personal financial cycle. Are things going well financially? Job secure? Money in the bank? Take a piece of paper and write the letter P for personal and an up-arrow next to it.
Next, think about the economy in general. Is it bad or good? If it’s good, across from the P -up arrow- on the same line or in a little box write, E -up arrow. E for economy. There are four possible combinations:
Personal:——————————— UP Economy:——————————— UP
Personal:——————————— UP Economy:——————————— DOWN
Personal:——————————— DOWN Economy:——————————— UP
Personal:——————————— DOWN Economy:——————————— DOWN
When your personal “P” is up, and the economy is up, save money for the inevitable down cycle.
When your personal “P” is up, and the economy is down, invest for the future
The worst case is Personal down and Economy down, because the two are inexorably tied together; i.e. out of a job (Personal) with jobs hard to find (Economy).
Remember the life of the farmer who is certain, as dark follows light, that winter will follow summer. He knows to save his extra harvest by canning or bottling it for the upcoming winter. This is the food which will enable him and his family to survive.
It is no different for us, just a little harder to see. Use my idea to simply chart the summer, spring, fall and winter of your personal financial life. Compare it to the economy as a whole and follow my aforementioned advice.
Oh and by the way, I decided to start my own business in 1996 to break away from the Brokerage business. When I applied to become a principal of my firm, a question on the form stood out like a sore thumb. “Have I ever declared bankruptcy”? Thank heaven my answer was no because the law does not allow one who has declared bankruptcy to operate a registered investment advisory company. My future would have been inexorably changed for the worse. This was one of the unexpected consequences that was not immediately apparent during those troubled times.
The lesson is clear. Be very careful, with big life decisions like declaring bankruptcy. While the reasons on the surface may sound valid and the path easy, you never really know the full ramifications of this type of action.
~Steve
Posted in On The Money! Commentary | Tags: investing, money, finance, management, money management, economy, Life, market, unprecedented events, financial, habits of investors, short-term investments, long-term investments, bankruptcy