I recently watched the HBO documentary Panic: The Untold Story of the 2008 Financial Crisis. The documentary discusses the events surrounding the cause of the 2008 crisis. And the sequence of events that the government took to prevent an economic collapse. It’s a great documentary that provides new information and sheds light on the event. It helps to demystify a lot of the public’s misperception surrounding the Troubled Asset Relief Program (TARP) or more often called “corporate bailout”. Right now your thinking, boring – someone actually watches this stuff. But wait, the financial crisis is a great lesson in controlling your own destiny and creating financial independence.
Watching the documentary took me back to those turbulent years during and after the crisis. It caused me to reflect on the state of my own finances at that time.
Back then a lot of Americans were struggling financially due to the recession. Fortunately, my wife and I had created a pretty stable financial situation for ourselves. An environment that provided financial independence while we weathered the storm.
Is Financial Independence All About Early Retirement?
For some, financial independence is a mantra for retiring early. In fact, it has become such a movement that the term FIRE is often used – Financial Independence Retire Early.
But what I learned about financial independence during the 2008 Financial Crisis had nothing to do with early retirement. For me, financial independence was about security, choices, and opportunities. Financial independence was about controlling my own destiny.
Let me explain.
External Forces and Your Finances
In my eBook Filling The Pig – In 4 Steps, I discuss internal and external forces and how they can influence your finances.
Internal forces are “things” like your beliefs, circumstances, or past experiences with money. These internal forces influence how you manage your finances on a day-to-day basis. In general, internal forces are controllable by you.
External forces are “things” that impact your finances but you have no control over them. For example:
- The Federal Reserve (FED) decides to raise interest rates. Raising interest rates inevitably increases the rates on credit cards and adjustable home mortgages. Result: your credit card debt becomes more expensive or your home mortgage payment goes up.
- The government enacts new policies or regulations. These new policies and regulations create fear and uncertainty in the market place. The stock market tumbles. Result: the balance in your 401(k) and/or IRA account goes down.
- An event, like war or a terrorist attack, takes place in the Middle East. The event creates a shortage of oil inventories, causing the price of oil in the United States to skyrocket. Result: Your monthly cost for gas doubles.
The 2008 Financial Crisis was a prime example of an external force. The crisis was created by years of high-risk subprime mortgage loans that cascaded into bank failures and eventually drove the economy into a recession.
The average American had no control over these events. However, for many, these events directly impacted their finances. The crises and state of the economy left many feeling vulnerable and exposed.
“Control Your Own Destiny or Someone Else Will do it For You”
Jack Welch former CEO of General Electric
If Life Gives You Lemons, Make Lemonade
It has been 11 years since the crisis. Adults in their 20’s and 30’s probably don’t even remember the impact the crisis had on the economy. As a recap, the economic environment in 2008 and 2009 looked something like this.
- By late 2008 the stock market had dropped over 700 points. Most Americans saw their retirement savings drop over 20% from the beginning of the year. (Keep in perspective that the Dow Jones Industrial Average was trading around 7,000 points, not 25,000 points like today. 700 points was a big deal back then.)
- Banks begin taking a conservative approach to lending due to the pending recession. Businesses struggle to obtain credit to grow their business or meet payroll. Economic growth stagnates, and for many small businesses, they need to lay off employees.
- Unemployment rate hits 10% in October of 2009. 2.5 million Jobs lost. (For comparison, the unemployment rate in 2018 was 3.9%)
- Home foreclosures reach a high in 2009 – 3 million foreclosures.
Entering 2009 the US economy was officially in a recession. For many households, the recession created financial hardship and stress. People lost their homes, jobs, and investments. Many were unable to control their own destiny.
However, what many individuals saw post-2008 as a scary, uncertain time, my wife and I saw as an opportunity.
Both of us were secure in our jobs. The only debt we had was our mortgage. We had accumulated a significant amount of cash in our savings account – from years of saving. The cash we had saved provided us with a sense of security and most important choices.
Late in 2009 and again in 2010, we purchased two foreclosures. We renovated them and then flipped them. In addition, we purchased a new house and rented our other house.
In each case. The stability and security provided by our finances allowed us to not only manage through the crisis but provided us with the opportunity to invest in real estate.
- The Art of Being a Cheapskate
- How to Pay Off Debt Using the Snowball Method
- A Personal Finance Perspective on Why Cash is King
- How to Create a Simple Budget
- 10 Successful Money Management Tips from a 52-Year-Old
- How to Buy a Car with Cash
- 3 Reasons You Should Budget Your Money And its Not Because You will Save More Money
- Do You Have Self Limiting Beliefs About Money?
- What’s Not Important When Paying Off Debt – Putting the Cart Before the Horse
What I Learned From the 2008 Financial Crisis
Looking back, our brief stint in real estate proved to be very profitable, and a lot of fun. But that’s not what I learned from the 2008 Financial Crisis.
What I learned was that financial stability and the independence we had created allowed us to control our own destiny. The ability to write our own story during some very bad economic times.
External forces like the stock market, housing prices, interest rates, global economies are beyond anyone’s control. However, the one thing we can control is how we manage our money.
If you can create an environment that helps insulate you from all the unpredictable, uncontrollable external forces. The things that can negatively impact your finances, your home, and your family – then financial independence becomes your mantra for controlling your own destiny.
Creating Your Own Definition of Financial Independence – Controlling Your Own Destiny
Consider these three aspects of your finances if you want to control your own destiny, regardless of what the rest of the world is doing.
- Saving Money. Having an emergency fund or cash in the bank that you can fall back on during major events like the 2008 Financial Crisis is critical. At a minimum, saving money allows you to overcome unforeseen emergencies and buys you time in the unfortunate event you lose your job or suffer a health-related issue that keeps you from working. Beef up your savings account – cash is king.
- Minimize Your Debt. Eliminating credit card debt, student loans, car loans… keeps you from feeling the negative effect of higher interest rates during a period of economic distress. Debt and the monthly payment that comes with it only amplifies the amount of money you need to budget. In addition, as you eliminate debt it allows you to save more money.
- Invest Long Term. The stock market and the investments you have tied up in the market should be viewed as a long term proposition. The stock market is influenced by so many factors. The market can change at any point in time. Unless you are a financial advisor or broker that participates in the market on a regular basis there is no way for the average individual to predict market outcomes. Maybe you have heard this quote “Time in the market beats timing the market – almost always”. Long-term investment strategies always win.
If history is any indication, global economies and financial markets will continue to ebb and flow. That’s how economies work. Events like the 2008 Crisis generally happen every ten to fifteen years.
The best thing you can do to buffer yourself from these types of external events is to manage the things you can control – your savings account, your debt and how you invest. Once you master these elements of your finances then you can create your own definition of financial independence and control your own destiny.
- Learn more about the 2008 financial crisis by reading, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System–and Themselves
- Motley Fool – Stock Advisor
- Wealthsimple – Automated Investing, Open an IRA Account, No Account Minimum
- Personal Capital – All Your Financial Tools in One Place
- Credit Karma – Free Credit Score, Monitoring & Insights
Did you survive the 2008 Financial Crisis? Comment below.
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2 thoughts on “Financial Independence is About Controlling Your Own Destiny”
I watched that documentary after reading your post, it was excellent, thanks! I’m guessing I lost about a half million in that downturn though at the time I barely noticed, I had all my investments in 100% equities and never sold anything and never stopped maxing my 401K, ROTH and regular brokerage investing. Now I’m slightly early retired and have never been wealthier, because I did not panic when that happened. My industry was recession proof and did not see any hard times during the 2008-2009 period so my income never suffered. Your advice is excellent. We had already paid off our house and had zero debt. We were cash flowing three kids through college but since they all got free academic rides it cost us virtually nothing. I kept reading about how bad things were but in our household it seemed surreal because it was mostly good times, as long as I didn’t look at the 401K statements!
Steve thanks for the feedback, glad you liked the documentary. Sounds like we were in the same boat back then – the right one. I wish more people could understand just how powerful it is to create a stable financial environment (cash is king, eliminate debt, invest long-term) that isn’t influenced by all the unpredictable stuff happening with the economy. They would also learn that events like 2008-2009 become huge opportunities. Thanks again for your feedback, sounds like you’re controlling your own destiny.