It's been a tough year for many people who've been caught up in the whole mortgage and housing mess. A lot of people got way over extended in all kinds of wild mortgage loans. And many people are losing their jobs as companies affected by mortgage losses cut staff and even close up shop altogether.
There's still another shoe yet to drop too. Energy prices are rising rapidly and the cost of goods and services has begun to follow, but hasn't yet matched, the upward trend in energy prices. As a result the next twelve months may be tougher than the previous twelve months for a lot of people. There's something you can do though. Think before you act.
People can't get back into the homes that they've lost. People probably can't get back into jobs at the businesses that have laid them off. And when those people do get back to work they will probably take salary cuts. There's a lot that we can't change. What we can change is the way that we approach important life situations. We can think before we act. We can act rationally instead of emotionally.
Acting rationally is rarely fun. And very few people want to be marked as a worry wart or spoil sport. Those kinds of characterizations are fleeting. I know a few people who thought they were heroes in mid-1999, borrowing money to buy stocks with absolutely no rational chance at succeeding. The market was flying high. A year later all of those people had taken huge losses. And while they were seen as pioneers and brave investors in 1999, no one was interested in what they had to say later in 2000. The emotion is fleeting and the perceived fortune brought on by emotional decision making is fleeting.
Rational thinking takes discipline. But the discipline pays off in more prudent decisions that protect us from bubbles like the stock market and real estate bubbles of the past decade. Rational thinking takes conscious effort. We need to think about our decisions based on a variety of available criteria. When making big decisions, come at them from all angles.
Is the purchase of a home with no money down and a negatively amortizing mortgage based on a rational decision making process? Is taking out six-figure loans against an already mortgaged property a result of a rational process? I don't think so. Both of those propositions involve a heck of a lot of risk. What if housing values drop? What if you lose your job? What if you get sick? Why not try to get a loan with a higher monthly payment but less risky terms? The same goes for buying stocks with borrowed money. Why not save some money, then buy the stock? Or better yet, buy a mutual fund that has a lot less risk involved. Think about it.
Besides discipline and effort we need knowledge in order to be good rational thinkers. We need to know why we're better off paying cash for a car than taking out a loan. We need to know why a negative amortization, zero-down mortgage is a bad idea. We need to know why saving for retirement is a good idea. And we can't expect anyone to jump forward and offer up that information. We need to go out and get it. We need to be a culture of learners. And I think we need to be skeptics too. We should ask lots of questions.
This is important to me because I hate to see people going through so much financial trauma. Much of it was unnecessary. Because as much as we hope there will be a time when a person who is selling something will have the best interests of the buyer in mind, I don't think that day's going to come. That's why we've got to get smart and realize that we are our own best advisors and advocates.
Consider governmental paternalism as another reason we need to get smart and think rationally in the future. As a result of this mortgage mess and the energy price increases there are many people in the U.S. government thinking of ways to do our thinking for us. This is scary to me. Certain legislators think they need to protect us from ourselves in making finance and energy buying decisions. So they'll make the decisions for us or they will limit our choices to a few.
You may not think that the government could ever take over our choices with respect to personal finance and energy. Well we've already had retirement finance taken over via the Social Security fund. That's gone so well that we have to save twice, once via Social Security and once to 401K, in order to plan for retirement. Only one of those choices guarantees that the money is yours to spend. Next thing you know we'll all be contributing to mortgage and energy funds for the good of all people.
One way to prevent the government or mortgage brokers or stock brokers from taking over our decisions is to think rationally for ourselves. It's a worthwhile philosophy to embrace. It may not be a fun philosophy. But going broke or having our houses foreclosed on is not fun either.
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