I have always lived in the Los Angeles area . One thing I learned in my countless trips to the beach was how to dig in the sand. In LA, the sand grains are usually large and light robbing anything you do with structure. If you dig a hole, it keeps falling in. If you build a sculpture, it keeps collapsing. The obvious solution is to add seawater to make mud, but that only has a limited life as the sand dries.
Such is the way with the 2007 housing bubble. Prior to that, as a CPA, I had seen people were using their homes as piggy banks to buy cars, expensive toys, and other homes. However, by 2010 according to the federal reserve board, their net worth had decreased from 40-47%. Just like building in sand, individuals tried to prop up their net worth using water (their equity lines), but that eventually dried up leaving many insolvent.
So what do you do if your net worth has catastrophically decreased?
- Do Nothing. Depending on your current financial status, you may want to ride it out. We CPAs call this a conservative approach. If you still have a steady income and are not planning on making a move, the loss may only be “on paper.” In other words, if you didn’t read the news, you may not have known that your net worth decreased by 40%. This does not mean that you should take more risk, or spend wildly, but you can plan conservatively and baton down the hatches. Much of corporate America has done because they are sitting on trillions of dollars of cash.
- Reinvent yourself. If you have one steady income and are not insolvent, this may be a good opportunity to invest in yourself into a new direction. As a CPA, I had see many businesses with high overheads downsize, running for cover. This could open up some opportunities in market places for young upstarts, like yourself. Or, if you are a small company, this can help you gain market share.
- Plan by looking at each step and the horizon. As a CPA, I have prepared business plans and strategic plans. I have found that the visionaries may trip over their feet in trying to make progress each day. That is because they are always looking at the horizon and not considering what is happening in the short-term. Likewise, the managers do not look at the horizon but only at what is needed today. They may wander without the knowing where they want to be 5 years from now.
- Know the tax implications of your decisions: If you plan to choose foreclosure or short sale, work with your CPA on a good tax projection. Know the tax ramifications BEFORE you make a decision, not after. If you are short selling a rental as opposed to a personal residence, know the tax issues because they may be different.
- Don’t play in sand anymore. Once you have decided what you are about to do, don’t repeat any bad decisions like running up debt, or investing in too much real estate. Discipline yourself to live within your means. As a CPA, I have seen clients increase their spending as their income increases. This type of behavior strangles resources that you may need in the future for other opportunities.
Speaking as a CPA who has seen more than 30 years of personal financial situations, I always tell people to plan. Each of your plans may have variations, and you also may have a handful of plans instead of focusing on one. The Internet will open up a world of information to you as you decide which direction you are to take.