I have been following the Greek debt crisis, which has supposedly been averted for now (again), and couldn’t help but draw some parallels between this and the way that many hyper-consumers live their lives. I thought it might be a good idea to do a post on it to put my own thoughts out there, and also highlight some key points that we as aspiring early retirees could actually take away from the whole debacle.
Now of course the finances of a government are completely different from those of a household, and I am not naive enough to think that you can run a country’s finances like you would your own personal budget, but I still feel we can learn something from it all, both in terms of personal finances and also life generally.
1. Try to see reality, not just what you want to see
It doesn’t matter which side you support in the whole Greece situation, but all parties seem to have trouble seeing the reality that others see, rather than just their own.
On one hand, some Greeks see a reality where they are being held to ransom by some governments (Germany at the helm), and on the other hand, the group led by the Germans see Greece’s situation as almost untenable and requiring serious austerity as the only way of addressing the situation.
Others still, including the Finnish finance minister Alexander Stubb, see it from the point of view of their own government, saying that they need to enforce some fairly serious measures to reduce the risk of Finnish taxpayers throwing away good money after bad. When I heard what he had to say in an interview it sounded entirely reasonable, but that doesn’t stop people from slagging him (and others like him) off as acting unreasonably.
Whichever view you support, the lesson is the same – you need to see the reality as others see it, not just what you want to see. Sometimes I can’t help but feel that the reality that some people see (including some friends, family and work colleagues) in relation to their finances is completely out of step with the reality that I see. While I know my reality is different to many of those people, I believe that it aligns fairly well with most people in the early retirement online community, and most of us would therefore see a pretty scary financial situation for many people and cringe when we hear about the latest car that they have bought brand new on finance.
2. Negotiate in good faith
I really couldn’t understand the whole Greek referendum situation – it was almost like Alexis Tsipras was hoping that if the Greek public said they didn’t like paying back their debt, then the creditors would back down. I’m sure he felt like he was being blackmailed with austerity, but he was then trying to blackmail the creditors with public opinion. That really doesn’t sound like negotiating in good faith to me, and I believe that we should all take that message away for our personal lives.
When negotiating for anything in life, whether it is to buy a house, a disagreement with your partner, or negotiating a raise with your boss, you really need to negotiate in good faith with the intention of actually following through on your promises. That approach really hasn’t worked for the Greeks, and I can’t see how it can work in our personal lives either.
3. Live within your means
As I said earlier, government finances are a very different beast than a household budget, but the concept of living within your means still applies in some fashion.
The discussion for so many governments seems to be about reducing a government’s budget deficit, and not even discussing the government’s debt. The Greeks got into so much debt, that they couldn’t even make the repayments without increasing their deficits further. That’s like paying off one credit card with another, just with a higher credit limit on the second.
At a personal level, we all have to see that we need to at least make a “profit” (i.e. not run a deficit) in our personal finances, which would include making proper debt repayments (and not just minimum credit card payments that will mean it takes 27 years to pay the debt off, or just paying interest on your home loan rather than paying off the principal). This is what I would see as the loosest definition of living within your means that most non-FIRE people would subscribe to.
For me, living within your means takes on a whole new meaning – you need to eliminate all consumer debt as quickly as possible (and never take on any consumer debt again), and you then need to have a solid plan to eliminate your mortgage debt as well. You also need to refrain from buying crap that you don’t need, as revolutionary as that may sound.
From my relatively simplistic understanding of the Greek financial system, they are nowhere near living within their means, with them spending more on pensions as a percentage of GDP than any country in the EU, and more than 24% (and rising) of the 11m population receiving pension benefits. The longer that they go on without making more drastic changes, the worse this situation has to get. With more working-age people leaving the country, retired people staying, and GDP falling, this situation can only get worse.
I’m sure it is a very hard position to be in, but it makes you wonder how many households don’t live within their means and don’t have any idea that that is what they are doing. I would know if I wasn’t living within my means because it would be staring men in the face every month when I review my own personal finances!
I have historically used MYOB to track my own personal finances, but from 1 July 2015 switched to Quickbooks Online (a great product that makes things even easier), but that will need to be a subject for a future post.
4. Realise when things are totally screwed
The more I read about the Greek crisis, the more I believe that they are utterly screwed, and that every bailout is just delaying the inevitable. I’m sure there are people in the negotiations that know this, but it’s much easier in political terms to avoid another event that could be a big shock, like Lehmann Brothers in 2008.
How often would that happen in personal finances? My guess is that it would happen every day. People trick themselves into thinking that they have solved a problem by taking out a new loan to pay off another debt, but rarely do they actually look at their profit and loss statement and realise that they are actually going backwards.
And rarely do they put together their personal balance sheet on a monthly basis, and realise that their net assets are continually going backwards. This is why tracking your personal finances, is such an eye-opener for most households, although it can be a very painful wake-up call.
I recently saw a case at work where a new client (a friend of one of our Senior Accountants) was referred, and in our first meeting it was apparent to me that he and his (recently ex-) wife were utterly screwed. We tried some new things, sold some stuff, and talked about making some changes in his business, but I really didn’t hold out much hope. He was optimistic, and things seemed to be getting a bit better for a short period, but here we are now talking to bankruptcy trustees, and it will drag him and his (ex-) wife down together. If they had realised initially that they were utterly screwed (as they appeared to me in the first meeting) then the train-wreck may not have been so bad, but I can totally appreciate that bankruptcy isn’t a reality that anyone wants to face.
I’m not saying that people should give up easily, but too often people can’t see the train coming even though they are tied to the train tracks.
So there you have it, some fairly simplistic, but still important lessons from the Greek debt crisis that seemed obvious to me all along. I know the situation is fairly complex, but I still believe that we can simplify things to an extent to ensure that we learn from this debacle ourselves. If only everyone saw it that way…
So what do you think? Are these realistic lessons or would you take something else from the crisis?