The Anniversary of the Crisis

Many financial columnists are beginning to write about the one year anniversary of the loosely-termed "financial crisis". So, I thought I'd jump on the bandwagon and add a few thoughts of my own. First, I think the word "crisis" is used with far too much frequency these days. I try to be exact in my use of language. I don't always get my words just right. However, I'm pretty picky about other people's use of terms. If anything bad that happens is termed a "crisis", what do you call something that is really bad? Is a "catastrophe" worse than a "crisis"? How about a "calamity"? All these descriptors and their use in our lives often depend on how we perceive the world. For example, if someone loses a job, is it a "calamity", a "crisis" or a "catastrophe"? I guess it all depends. If the person who lost his job was financially prudent, saving money regularly, keeping a financial reserve of six months to a year of expenses and keeping personal spending within his budget, then a job loss would just be an obstacle or a setback to overcome. It wouldn't rise to the level of any of the "c" words above. However, if the person was awash in debt, had no savings and always spent more than he earned, a job loss might well be a "catastrophe" or worse.

Sound financial principles have stood the test of time because they are sound and tested by time. Pay yourself first and build up a reserve of cash for unexpected events. Make and keep a budget. Invest your capital in low-risk, diversified asset classes. If we can take a lesson from the past year, it's that risk and leverage have a way of turning on us just when we don't expect it. As soon as you're sure that your prospects can go nowhere but up, let me know. I'd like to borrow the crystal ball you're using.