Learn From Others’ Financial Mistakes & Avoid Your Own

I'm in DebtThe same financial mistakes that are playing out on a global scale can undermine us as individuals, families, and small businesses. Would you rather make the same financial errors yourself, or simply avoid the mistakes of others?

When you watch, read, or listen to news of the European financial crisis, don’t just shake your head because the billions involved seem so removed from your daily challenges with the Loonie. Instead, zero in on three valuable lessons-learned from the Eurozone that can translate into financial resilience as real estate owners:

1. Economic Vulnerability: False sense of security à la “too big to fail” “Seventy percent of Italy’s debt matures in 2012,” stated one international business expert in responding to questions concerning Italy’s greatest challenge as the European Crisis deepens. As I write this column, speculation concerning “too big to fail” has moved from lending institutions to countries. The occurrence of previously-impossible “big” financial failures, should have taught us that the impossible does happen in this globally-interconnected world. Ignoring increasing financial vulnerability got the European Union where it is today. What are you ignoring? What could sneak up on you?

Are you living with a “too big to fail” illusion about your own financial situation? Reigning in unrestrained spending may have helped weather the 2008 crisis, but as a long-term strategy it leaves a lot to be desired. If you’ve taken the smart step toward debt reduction, you’ve explored strategies for reducing the total amount of interest you’ll pay on your mortgage and other debt. However, even that may not be enough.

Knowledge is power as the next phase of the global crisis emerges. Have you crunched the numbers so you know exactly where you stand if you or your spouse experience pay cuts or lay offs? How long could you continue to meet debt payments and living expenses if one or both of you lost your job? Hoping this is not going to happen is not a strategy. Searching out ways to cut costs, barter goods or services, and earn additional income before a problem arises are strategies. Wait until something negative occurs and you may not have enough time for solutions to kick in.

Beware of false economies like not servicing the furnace or skipping the eavestrough clean. These and other essential annual maintenance tasks can cause very expensive problems if ignored. But isn’t that what happened in Europe?

2. Get Everyone Onside: Not cross-purposes, but common purpose Political machinations overshadow economic solutions. One minute a sound financial strategy has been announced; the next, a political manoeuver has squashed it. If you co-own real estate with a mortgage, taking the time to be sure you’ve agreed to deliberate repayment strategies and are both committed to them is essential. Paying off the mortgage more aggressively than through traditional monthly payments will require reworking of the family budget. If you don’t have a written monthly financial plan, money can slip through the cracks. Saving on mortgage interest carries less overall value if credit card debt is rising dramatically to cover the siphoning off of income into mortgage debt. Involve all family members, so they share the belt tightening and the triumph of reduced expenditures.

3. Keep the Facts Straight: Perceptions distract from reality European prosperity turned out to be an illusion. Perceptions of economic well-being mattered more than reality, and over-spending reigned. This glorified “keeping up with the Jones” is often parallelled in everyday life, and it can be just as destructive. Living beyond your means was an acceptable standard earlier in the 21st Century, but it endangers your financial future as national and provincial deficits rise. You know that, but have you really adapted spending habits to this reality? Too many property owners spend on dining out and travel, but let their real estate become out-dated, which in turn reduces value.

Of the overall housing market, Canadian homeowners have about C$2,035 trillion in equity, equivalent to about 68 per cent of the total housing value, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP,org) recently released consumer report, “Annual State of the Residential Mortgage Market in Canada.” Seventy-eight per cent of borrowers with a mortgage or line of credit have at least 25 per cent equity in their home. On the whole, unless you lose your job, CAAMP considers mortgages affordable for 84 per cent of borrowers at these interest rates and higher. However, that leaves 16 per cent unable to afford an increase of C$200 or more per month.

To preserve and build home equity, keep analyzing all that goes on around you. Lessons learned the hard way by others, even countries, in one context can translate into inspiration in yours.

World economic turmoil will continue for some time – turmoil which is now having an impact on our personal lives. Are you prepared to weather the storm?

Written by PJ Wade