Sunday, January 17, 2010

Lessons from the credit crisis

I used to joke about the fact that taxi drivers know everything about high speed Internet, the difference between cable, ADSL, ADSL2, or even satellite dishes, but when you ask them about how compounding and inflation works, that was none of their business.

This anecdote shows very well what the general trend was before the crisis, finance, even simple personal finance, was for the big shots in Wall Street, bankers and financial advisers. They were there to look after your money, to advise you on your investments, and to prepare your nest egg for your pension.

Unfortunately, it went all wrong. The finance professionals are collecting your money to invest it wisely and to advise you on your investments? That was the tale until we discovered that the pension funds are digging holes so deep we won’t be able to get out of it, banks were packaging CDOs based on mortgages from subprime borrowers who would never be able to pay it back, private equity companies were going public to raise money from mom and pops whereas in the end they destroy jobs. That is what happened, and all of it with your money.

Finance, and more specifically financial planning, is not complex. Although you might believe it is complex, it is less difficult to understand than Internet technology. The problem is that finance and financial concepts have been kept away from the crowd to benefit from information asymmetry. This means that you end up paying more for the service just because you don ‘t know how it works, even if it is based on very simple concepts.

So, what to do about it? Spend some time to learn about personal finance and financial planning, it is the best investment you can make. And guess what, you can do it for without paying a dime. offers interactive graphical tools to do your own financial planning taking into account retirement, buying a property, education fees and much more, everything for free.

Although building a financial plan on your own might be a little complex at first, you can start by using the application to understand the effect of compounding, why inflation is your worst enemy, and how buying a property can affect your long term cash position.

The site comes with many articles and examples on how to use the application, for beginners as well as for advanced users. With its friendly user interface and cute icons, the tool offers a very intuitive way of understanding financial planning.

No comments: