Sunday, September 10, 2006

How to Avoid Bankruptcy, Part 3 -- Personal Responsibility

I have previously mentioned how public policy and circumstances beyond our control limits our ability to avoid bankruptcy. Now I want to mention what you can do to avoid personal bankruptcy.

First, the secret to wealth creation is to learn to live below your means. In this regard, I agree with Stephen Snyder at If you have been through bankruptcy, Stephen's site is a good one for learning about how the credit system works and personal budgeting. The only real criticism I have of him is his recommendation to his readers that they invest in real estate. With the housing bubble now in full bust mode, now is not the time to invest in real estate.

There are many, many people who preach this doctrine. Dave Ramsey is another Let me make clear that I do not subscribe to Dave Ramsey's idea of never using credit. Rightly or wrongly, too many things are based on our FICO score. I do agree with the principle of living below your means and responsible financial management.

Secondly, right now all of the best minds in the financial sector seem to be saying "cash is King."
Volume on Wall Street is very low, and most of the big brokerage firms seem to be staying out of the market and keeping everything in safe savings accounts. I saw one mutual fund that had no investments other than savings. Now that's bearish for you.

In the coming years, unless the Fed starts printing vasts amount of money to inflate consumers out of debt (an unlikely scenario as Bernanke has pointed out that Congress' mandate to the Fed is that the Fed control inflation), there will be several defaults that will accelerate in the coming years. For people who are entrepreneurs, this will become the time to buy on the cheap.

Last year, for the first time in many years, consumers incurred more debt (108%) than they made in income. Part of it was attributed to people incurring long-term debt such as housing, but because of this mad rush into real estate investments, a lot of those same people were buying real estate at the top of the bubble. Now that real estate prices are starting to come down, a lot of these people who bought based on an irrational belief that real estate, as a commodity, can never go down in price are going to be in for a rude awakening. See the Housing Bubble Blog for anecdotal evidence. There has also been a lot of fraud in the mortgage and housing mania. See the Mortgage Fraud Blog for anecdotal evidence of that.

Most of the best economic minds are predicting an economic slowdown. The way to survive the coming economic onslaught is to cut your expenses and live frugally.


Teri said...

I basically lost everything financially in the dot com boom. Was just a worker bee that managed to protect my 401k, until I had a 13 month lay off between jobs and had to take an $8 an hour job to get back to work. I'm still struggling. In fact, we managed to sell the house and moved out to the woods. We have no utilities (except XM radio), as it didn't seem like we were able to afford utilities with both of us working as hard as we could. I've learned about bulk foods and food storage. I learned all the other frugal tricks a long time ago, but they sure don't seem to have helped much. Managed to save $1000 last year and the IRS came back and said we owed almost that much in taxes. I'm not convinced that people are going to be able to bail themselves out on this one by following the standard "frugal" advice. I still have to buy gas to get to work, still have to pay taxes. I've cut back pretty much all there is to cut and the check still doesn't stretch. It's going to get ugly fast when people can't afford to feed their families.

OkieLawyer said...


A very good post. That is why I talk about the need for social justice in some of my other posts. It is important to keep a balanced perspective. We talk a lot about "personal responsibility," but fail to raise the profile of the other side of the coin: the idea that people should be paid what they are worth based on their productivity and value to the company (private) or society (public employees).

We also need to find a balance between economic dynamism (capitalism) and social stability (welfare programs to take the edges off of effects of capitalism's losers).

In our culture we are taught to value "rugged individualism." But the reality is that most people do not aspire to the sacrifices that are required to make it to the top. For those people, we need to provide more stability -- even if it means some financial sacrifice from the "winners" in our economic system. In fact, there used to be a value of "noblesse oblige": the idea that those of noble birth or success should help those less fortunate than themselves.