We are all Greece


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I have this recurring nightmare.

Actually, I’ve got a lot of frequent bad dreams but this one’s particularly chilling. Things were O.K. at work.  I was growing my responsibilities, my authority. I was getting promoted quickly. I was making money. So, like a financial optimist, I bet on the future and started borrowing.

It started small and harmless — I took a large mortgage on a house — but then, I started borrowing more money to finance a rich lifestyle.

Soon, it was like ballooning like Bono’s ego.  I had to borrow just to pay off my old loans.

It took so much financial engineering, I didn’t even have time to work  – I was so busy.

But then, out of the blue, people didn’t want to keep lending to me.

I was coming up short, compounded by the fact my work slacked and earnings were dropping as a result.

Crap, I was stuck.

I had been Greece-d.

What happened to Greece

For years, Greece had been the Nicholas Cage of Europe, taking the euro as its currency without demonstrating much fiscal discipline.

Having the euro was great because that meant the Greek government could keep going back to the financial teat and borrow more and more money at responsible rates.

The country racked up too much debt and now, they’re completely reliant on the countries and banks that leant them money in the first place.  Plans to bail Greece out are off-again-on-again and the political situation is just complex.

The point here is that by entering such a cycle of indebtedness, Greece has lost the ability to be the steward of their own destiny.  The technical term for this is that the country is essentially the lapdog of its creditors.

How to improve our own finances

We can avoid becoming Greece.  Yes, times are tough, jobs are hard to come by, but we’re still the masters of our own futures.

Here’s a few resources and tips that can help individual avoid becoming Greece-d:

  • Knowing is half the battle: Even without GI Joe’s (remember that cartoon?) sagacious advice, understanding how we got into this mess can contribute to how we avoid another fiasco in the future.  Check out M.I.T. economist Andrew Lo’s 21 book suggested reading list about the financial crisis. Greece (and every country) has an agency problem: every citizen theoretically knows that high borrowing is unsustainable but insert some government politicos in mix who want their tuchesses re-elected and no one is going to roll back the borrowing.  That’s a hard political decision.  Instead, it just became easier to keep borrowing. Just like with your stock broker who acts as your agent, investors must ultimately call the shots.
  • Spend like a millionaire: Did you know the average millionaire spends a little over $30,000 on a car?  Those with over $10M in assets spend just a bit more.  The really rich don’t spend money on cars.  The Ferraris you see out there aren’t driven by the truly rich.  If you want to be a millionaire, start spending like one.  Read The Millionaire Next Door for more on how the rich live.
  • Pay off debt first: If you’ve got high-interest loans outstanding, the best investment you can make is paying them down.  Greece waited too long, borrowed too much and now is stuck.  The way Greece handled this was by repaying outstanding debt with new debt, kicking the can down the road to bankruptcy.
  • Cut out the excess fat: Yeah, yeah, everyone says that but it’s not easy to do.  For goodness sakes, Greece can’t even come close.  But you don’t have to auction your belongings and children off to cut down.  Ramit Sethi proposes to use a two-headed savings approach: identify your two biggest discretionary expenses and then cut 25-33% off of them over over the next 6 months.  By targeting the big expenses with a gradual approach, cutting back becomes a lot easier psychologically.
  • Stick to your goals: One of the criteria Greece and other EU countries were subject too was a debt ceiling. They’re not supposed to borrow more than 3% more than what they produce.  Clearly, Greece didn’t have a signed hall pass as the country marched to AP Bankruptcy class. We can institute similar controls and goals on our own accounts.  Consider using something like Stickk to help your brain commit to specific outcomes by implementing real consequences.
  • Get giggy: No, that’s not jiggy mispelled.  One of the best ways to balance our own bank accounts is by actually bringing in more money.  Have some expertise in your field?  Consult on the side, develop informational/educational products to distribute online.  Sometimes it’s actually MUCH easier to bring in more monthly moola than it is to stop buying that fancy brand of peanut butter you like.  By gigging at night or on weekends, you can really ramp up your income.

Governments of the world are in real trouble.  They’ll make it through.  We’ll all make it through.  But, as informed investors, we can learn from our mistakes and sidestep real financial problems in the future.

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