Question

This discussion will consider lessons learned from the most recent financial crisis and recession.

The year 2008 ushered in one of the most challenging economic periods in U.S. history. The effects of prolonged unemployment and reduced asset values for homes and personal wealth continue to affect people’s potential to realize their personal wealth objectives.

Identify two concerns that individuals should address in developing their own personal financial plan related to lessons learned from the risks identified during the most recent U.S. financial crisis. What approaches should be included in a personal financial plan to address and minimize future risks with respect to these concerns?

Answer 1

Answer: Financial crisis 2008- U.S Financial crisis is also called sub prime mortgage crisis. In 2007 when interest rates were down, people took mortgage loan from banks and financial institutions and built the properties. Banks also lent loan without proper documentation. When U.S Government raised the interest rates, demand for loan came down that decreased the demand for properties also. Properties got unsold and borrowers could not repay the loan, banks got bankrupt and has liquidity crunch. This crisis did not only affect the USA but other countries also.

Lesson from financial crisis-

People should take a lesson from this crisis that one should analyze his/her risk taking capacity and his investment goals also. One should not put all his/her savings into one investment alternative only rather he/she should diversify his/her earnings into different asset class so as to diversify the risk. People should make a balanced portfolio in which he should include risk free securities, debt, equity and mutual fund. People who cannot do investment planning at their own because of lack of knowledge and time, they may hire personal financial adviser for planning their financial needs and goals.

Taking loan is good but too much loan is not good. Heavy debt is the obligation that has to be repaid along with interest. People should take loan as per their capacity to repay it.

Banks also should be careful in giving loan. before lending loan, banks should check the credit score and credit history of that person.