One of today’s most important skills is also one that is not taught in schools. Financial illiteracy is responsible for millions of debt-fueled lifestyles every year, from out of control personal spending habits to investments and property purchases that lose grasp of reality. As the last two years have proven, massive debt and the lack of risk management seem to be no foreign concept for lenders and investors, with the two groups of people embracing risk as if it is not even there at all.
Of course, everyone knows how that turned out. What could have been an ultra-profitable exercise in investment, turned out to be possibly the biggest financial meltdown in history. The result of 20 years of overconfidence and lack of risk management came crashing down and left the world in a financial position that is incredibly difficult to escape from. Major investments, once the driving force behind the global economy, dried up, and people were left looking at bankruptcy solutions and restructured payment plans.
Risk Management and the Current Recession Period
What was missing in this great recession was a sense of risk management. The last two years of economic activity were the result of risk running too far, sense running too thin, and the management of investments running too high on the greed scale. Rather than creating a healthy profit, investors depended far too much on ultra-high returns. Where are many of them today? Sitting in courts, waiting for their turn to process and relieve those debts. While many of the debts will undoubtedly go unpaid, the amount of assets being turned over to lenders is astronomical, with many businesses completely transformed in the recession.
The lesson of the last two years is not to time investments to avoid situations like these, but to strategically structure them so that personal or business bankruptcy simply is not the next step in the logical progression. When looking from afar, it is relatively easy to see failure coming. But, when people are wrapped up in an investment, it seems like a completely foreign concept. While bankruptcy courts go through thousands of cases every month, each one has the same sense of misunderstanding and uncertainty surrounding each case. Investors walk in expecting to succeed, without even thinking to prepare for the worst possible scenario.
The Key to Avoiding Bankruptcy During Recession
The key is to always minimize debts, and practice the ultimate form of self-sufficiency. Of course, in a global economic sense, self-sufficiency has proved disastrous and unobtainable. But, on a personal or corporate level, it is a very powerful solution. When people or businesses are entirely financially self-sufficient, the market changes don’t affect them, the crashing of loans and easy credit is entirely in their periphery, and the potential personal or business bankruptcy crises are things that simply do not enter their minds.
When they control every single aspect of their cash flow, outside factors (other than currency and property value) simply do not touch them, and the possibility of personal or business bankruptcy is placed entirely on themselves, not on the position of outside investors and the banks.
Simply put, the entire recession of the last two years can be put down to overspending. Not overspending, while seemingly unknown to the investors of 2008, is the key to avoid personal or business bankruptcy.