The Credit Crisis - What Has it Taught Us?

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The credit crisis seems to reach new levels every day.
There are more foreclosures, house prices drop even lower and we can't get loans for new purchases.
The crisis has come about because numerous mistakes have been made.
The government didn't set up necessary legislation, financial institutions were greedy and borrowers didn't consider whether they could afford the debts they borrowed.
So, when we look back, what can we as individuals learn for the future? We need to have order in our own house first.
I am a big believer in personal responsibility.
We can complain all we want about the incompetence of the politicians and the greed of Wall Street.
But first we need to take a look at our own behavior and see if we have acted as we should have.
I have made this list of some major lessons we as individuals should consider.
Know your mortgage
Many people have not been considering whether they could afford their mortgage to pay for their house.
I think a lot of people were persuaded into a mortgage they could neither pay nor understand.
We need to know what we are buying, especially if we are buying something as expensive as a house.
Just because the nice man in the bank wants to lend us the money, doesn't mean we can afford it.
I recommend looking at a plain mortgage.
Can you afford to pay a 20-year loan at a fixed interest rate and repayments on the principal right away? If so, you can afford to buy the house.
If not, it doesn't matter how fancy a loan the financial industry can come up with, you basically still can't afford it.
Live within your means
Both society as a whole and many people are not living within their means.
If you keep getting credit, you will undermine your future financial position.
Of course, you can get to a temporary tight spot or you can need loans to invest in a house.
But using your credit card to buy everyday goods is not very advisable.
Be critical of advice
Taking advice from the people who want to lend us money, or for that matter sell us anything else, creates a potential conflict of interest.
They are interested in selling as much as possible and you are interested in paying as little as possible.
So be very critical of their advice and verify their claims from a second source that has no vested interests.
If you don't know anything about it, I think it is wise to consult an independent adviser before signing a house deal.
It might cost a little, but it can save you a lot down the road.
Prepare for the bad times
The economy moves in cycles.
Some years are good; some are not so good.
Yes, this is even worse than the normal downturn, but we will make it through nevertheless.
What you have to remember is to prepare yourself for the downturns, during the good times.
This means making a cash reserve, investing in your retirement and generally living within your means.
Involve yourself in society
Although the market is generally taking care of many things efficiently, we can't let it work without any supervision.
Some people's greed can destroy it for everybody if we don't keep an eye on them.
There needs to be some legislation.
History shows us every society needs some common playing rules to make it work in everybody's best interest.
So be involved in making sure both political and business leaders act in the common best interest.
Of course, many more lessons can be drawn, depending on your personal conditions.
There are also many more lessons for both Washington and Wall Street.
But I believe these are the most important ones for us as individuals.
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