Ten Years- Reflecting back and looking into the future

On September 15, 2008, the fourth largest investment bank in the United States declared bankruptcy. Lehman Brothers, founded in 1850, was en route to its demise. Due to its risky investments in subprime mortgages, the company could no longer sustain itself. This behemoth firm, which had over $600 billion in assets AND over $600 billion in debt at the time of the bankruptcy filing, seemed to be the poster child of all that was wrong with the banking industry. The fall of Lehman Brothers had an immediate impact on the rest of the global economy, starting a domino effect that resulted in the worst financial crisis since the Great Depression.

The 10 year anniversary of this fallout has created some headlines. The experts all have their say as to whether or not we learned anything from the events that transpired 10 years ago. I guess we’ll figure out if we really learned our lesson when the next crisis happens.

At the time, I was busy taking care of an infant, still trying to get used to the idea of being a mother. The three of us were living in a small, 1 bedroom apartment with my dear cat, who I had adopted during my senior year in college. I used to watch the news back then, and I distinctly remember the uproar over the fall of Lehman Brothers. I knew next to nothing about personal finance and investing at the time; all I knew was that the economy was in really, really bad shape.

I was fortunate in that I had very little in terms of assets and investments. The timing worked out in my favor as I’ve been able to see the positive effects of a long bull market on my investments. I am fully aware the timing is all dumb luck. There was absolutely nothing I did to warrant such great returns; moving more money into investments just happened to coincide with when Mr. RLDVM’s training was finishing up and he started his first attending job. Meanwhile, there were millions of people that lost their jobs and their homes during this very same time period. Many never fully recovered, either financially and/or emotionally.

If a similar event were to happen now, I would have much more to lose financially. This is one of my motivations for becoming more financially literate. I simply don’t like the idea of losing a bunch of money when I could have been better prepared to weather a financial storm. Laying a good foundation now will lead to better results in the future.

While economists and journalists talk about the 10 year anniversary of the Lehman Brothers bankruptcy filing, I decided to take this opportunity to reflect back on my own financial situation 10 years ago and compare it to where I sit now.

TEN YEARS AGO

1. We had just started living off of one income since I had stopped working earlier in the year. It didn’t make sense to go back to work when we had a new baby and we were supposed to move later in the year anyway.

2. We continued getting money deducted automatically from our checking account to a savings account; we started this savings habit shortly after we got married. In other words, we were budgeting without actually budgeting (the actual budget part didn’t come until years later).

3. We were renting with hopes of being homeowners soon.

4. Mr. RLDVM was driving my Honda (that I got while in vet school) while I was borrowing a relative’s car.

5. We were making minimal payments towards student loans, which probably totaled about $150k at the time. We were essentially treating our student loans like a mortgage.

6. We were maxing out our Roth IRA’s.

7. We had opened a 529 account for our son.

FAST FORWARD 10 YEARS

1. We’re still living off of one income. Mr. RLDVM’s income is more than enough for us, which has allowed me the choice to stay home.

2. We’re still paying ourselves first by putting money into savings as soon as the paycheck hits our checking account. The amount has increased in proportion to income. These contributions are non-negotiable. We live off of whatever we have leftover.

3. We are now homeowners.

4. We still have two cars. Mr. RLDVM drives the car that we bought when we moved 10 years ago. It has well over 100,000 miles, and it’s still running pretty strong with minimal maintenance issues. We got our second car a couple of years ago when my Honda got rear-ended and the repair costs would have been greater than the replacement cost.

5. Student loans are gone.

6. We’re continuing to max out our IRA’s. We got smart and are maxing out his workplace retirement accounts as well.

7. We now have 3 children. Each of our children has their own 529 account.

I did not start keeping track of net worth until recently. I’m pretty certain that our net worth was well below zero 10 years ago due to student loans. It was even further in the red once we bought our home and a car.  A combination of dedication, planning, and taking advantage of a good income have allowed us to achieve a healthy positive net worth 10 years later.

ALTERNATIVE SCENARIO

What if we hadn’t focused on saving and paying down debt? What if we didn’t have any concrete financial goals? Here are my predictions on where we would be financially:

1. We’re still living off of one income because based on the numbers, it should be enough to support our household.

2. We didn’t increase our savings to match the increase in income, which would mean that our savings rate as a percentage of our gross income would be lower.

3. We are homeowners, but we live in a more expensive home with a mortgage that the bank says we can afford. We would be content paying this back over 30 years. In the meantime, the house would cost more to insure and maintain than our current house.

4. We would have two cars, but the newer one would be more expensive.

5. We would still have student loans because the interest rates are so low (less than 3%).

6. We would not be maxing out his workplace retirement accounts because we don’t understand the benefits of doing so.

7. We would have 529 accounts with smaller balances because we figure that we can just cash flow college when it happens.

The result of this scenario? We would probably feel pretty well off because we’d have extra cash flow every month.

But if you were to take a look at our net worth, we’d be in bad shape. Our debt load would include a bigger mortgage and student loans. Our savings would be less than what we have currently because we didn’t adjust our savings to match our income. We’re just kicking the can down the road- all of that debt will need to be paid off at some point, and we’re just choosing to deal with it all later. It will all work itself out, right?? (It will work out, but probably not the way you intended.)

In the meantime, lifestyle inflation would continue to eat up whatever cash we have on hand. Once that cash is gone, it’s gone. Any money that is not saved or invested has no potential to produce more money down the line. This will certainly delay the amount of time it will take to reach financial independence.

Thank goodness this scenario was playing out in some alternative universe. I like my reality right now much better.

WHAT ABOUT THE NEXT 10 YEARS?

What do I hope for 10 years from now? We will nearly be empty nesters at that point. We will still be saving our money and maxing out retirement accounts. The house will be completely paid off. We may have more than 2 cars since all three children will be of driving age, and we will be able to pay cash for any car purchases and budget for additional drivers in the household. Our contributions to 529 plans will have either diminished significantly or completely stopped. Hopefully, our investments will have grown to the point where we are near financial independence.

However, I’m a realist. I know that plans can change in an instant. I’ve seen enough in my own life to know that life can be incredibly unpredictable. The point is not to have the perfect plan. The point is to have a realistic plan. One that will let you sleep well at night, knowing that you can better weather any sort of financial difficulties that may come up in the future. A plan that will make you feel more confident that you’re using and managing your money as you fit. A plan that will need to stay flexible because life is anything but a static, predictable journey.

I hope that you can go through a similar exercise by reflecting on the past 10 years of your life. Where were you 10 years ago? How does your life differ now? Does it look drastically different from what you had imagined? Where do you hope to see yourself 10 years from now? And how do you plan on getting there?

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