In our last entry we discussed the external economic factors that contributed to the current financial crisis.  Today, we want to discuss the things that many of us have done or not done with our personal finances that have contributed to the overall financial crisis and to our own financial problems. 

 

Everyone always wants to blame others for their problems.  More and more it seems that people don’t want to take responsibility for anything.  Individual Americans have also contributed to the financial crisis by not having their own financial houses in order.

 

We’ve been overspending and under saving.  It’s amazing how many people do not have an adequate emergency fund.  An emergency fund can help people survive a temporary job loss and avoid foreclosure on their home.

 

Over-spending has led to excessive credit card debt, which in many cases has led to excessive home equity debt.  Home equity loans coupled with low or no down payments on homes and the sudden drop in home values have left people little or even negative home equity in many cases.

 

Two-income families often take on more debt than they can properly service should one of the two lose their job or become disabled.  If a job loss is coupled with an inadequate emergency fund, high credit card debt and little or no home equity, it can be a disaster!

 

To top it off, all too often, new clients come to us thinking that their investment portfolio is broadly diversified.  In many cases, we see portfolios with 80% to 90% invested in the stock of large domestic companies.  While the clients hold a variety of mutual funds, they are often highly concentrated in U.S. stocks and thus are not truly diversified.  Even though almost all types of investments have dropped with the recent market declines, a more broadly diversified portfolio would have loss less than one concentrated primarily in U.S. stocks.

 

So while it’s common to want to place all the blame for crises such as this on others, we need to also look at what we could have done to prepare ourselves to better weather such an event.  Our future BLOG entries will discuss many of these areas in more detail.