Musings of an Idiot

Finance

When I was younger I always got confused whenever someone talked about spending more than they had or could afford by taking out loans in order to invest. I guess to a small extent I still don’t believe in spending more than you can afford in hard cash or through recognized channels of income and maybe that’s why I haven’t made too much progress in building a financial empire :-). But seriously – looking at the economic crisis happening around the world – to me it seems like the main problem is that people borrowed to buy what they couldn’t afford and the banks and financial institutions allowed it in order to make a quick buck and look where that 's got us. As far as stocks are concerned – the thing that always bothered me was the future of a company could rely so heavily on what the shareholders thought how the company was doing and to me that is a major risk because share holders are not privy to all the information and decision making that goes on within a company plus if they don’t have an appetite for calculated risks and instinct of the leaders within the company then a company with good and sound fundamentals can still fall apart. Add to it the fact that people dabble in shares to make a quick buck.

In asian countries people don’t buy a house till they have saved up most of the amount for it and sometimes it takes almost their entire working lives to do that. In complete contrast are western countries where you cover a small upfront deposit and the bank covers the majority of the amount while you pay them interest only payments to survive on existing income and have the satisfaction of saying that you ‘own’ a home. You sell it off a few years later when the property prices have risen and you make a capital gain out of it and that’s how you create wealth. But the problem is that if you have unforeseen emergencies like loosing your job or a major life event and you default on your payments then you’ve made a huge loss because your financial wealth creation security has just disappeared from beneath you.

I am obviously over-simplifying a complex set of financial issues but the fact is that we live in an increasingly fragile world where people are loosing jobs, loosing their homes and barely scraping through a living and the question I have is – is it worth living beyond your means? I don’t have a financial empire but the only thing I can say in my favor/defense is that I am debt free. Something ingrained in me hates being in financial debt.

Till later,
Amit

Labels: Random

posted by Amit @ 9:29 PM