What Economists are Predicting
Many economists and investors believe that we experience a crash every 10 years. When looking back at history, there seems to be some validity to this statement.
In the 1980’s we had a loan crisis that sent the stock market plummeting and cost the Dow Jones around 20% of its value. Then in 1999-2000 we had the infamous dotcom bubble that took the NASDAQ down by almost 80%. And then our most recent experience, the housing bubble of 2007-2008. Caused by subprime mortgage loans, this crash lead financial markets to a loss of almost 30%.
What do all of these moments in history have in common? They took place roughly 10 years a part.
When you look at the news today, there’s talk of another housing bubble. It’s only a matter of time until this bubble pops.
For financially educated investors, this news is music to our ears.
When you have a strong understanding of the relationships between the income statement and the balance sheet, you can make profitable financial decisions in a boom or a crash. The economy is a force that you can’t control, however, you can control your own financial decisions that can maximize or minimize its impact.
According to a Federal Reserve economist, single-family home sales for this year are weakening consistently across the country.
When looking at previous recessions, economists have been able to pinpoint when the peak would be compared to the crash. Some economists believe that December 2018 was the peak and that the crash will be following anywhere between 1-2 years after.
Not to mention that when you look at the current mortgage rates and adjusted housing prices due to inflation, similar patterns to past crashes are being recognized.
In an effort to prevent this crash (or weaken it), many economists are advocating for rate cuts. These rate cuts are intended to adjust and manage inflation. We could be expecting up to 3 rate cuts this year, but Federal officials have not confirmed or denied this act of policy.
What does this mean and what should you do?
This might seem scary and overwhelming, especially if you felt the hurt from the last crash. But the beauty of this is education. You know a crash is coming, and you can do something about it!
You have to understand that money does not make you rich. Your financial education makes you rich. If you gave $1,000 to a financially educated person and $1,000 to someone with a low financial IQ, I bet you would see a huge difference in how they used that money.
Understand how the income statement and balance sheet work together. This allows you to understand and see your cash flow, then you can make decisions that will help grow to its full potential.
It’s simple insight that can get you a six-figure income: an asset is something that puts money in your pocket, a liability is something that takes money out of your pocket.
One lesson that Rich Dad advisors love to teach is the example of a house. Is a house an asset or liability? It depends. We’re taught growing up that it’s an asset. But when you go back to our simple insight, a house takes money out of your pocket, therefore it’s a liability.
But when a house is generating you cashflow, that house is an asset because it is putting money back into your pocket.
It’s an interesting lesson that can take some time to wrap your head around, but once you get it, you’ll be the person getting out of the rat race!