I’m not sure if you caught this news, but Detroit, Michigan is now officially bankrupt. After decades of overspending, Detroit has now become the largest U.S. municipality ever to file for bankruptcy. The city faces $18-billion in debt and that number climbs higher every day. Sadly, for the residents of The Motor City, Motown, and for sports fans, Hockeytown USA, everything has officially collapsed.
How did this happen? How could what was once the country’s 4th
largest city go flat broke?
Well, from what I’ve read, extreme city government money mismanagement occurred and kept occurring, for years. Combinethis prolonged attitude of borrowing at all costs with a slow steady decline of Detroit’s manufacturing industry and you’ve got another significant strike with many people out of work. The third and final blows came from macroeconomic conditions far beyond the city’s control, a dot-com bubble that burst over a decade ago and more recently The Great Recession that many Detroit residents never recovered from. Three big strikes and you’re out.
Public Domain Image: Public Domain
Want some proof of how bad
the situation in Detroit really is? Take a look at these real estate prices on Zillow here
. There are, on this site alone, almost 5,000 houses ready for foreclosure auction. Let me give you some examples of how low things can and will likely go…
- I recently heard about a house selling for about $500.
- Some 2-bedroom, 2-bathroom homes are being sold for less than $10,000.
- You can buy an entire 20-room apartment building for less than $60,000.
- You can call an 8-bedroom and 8-bathroom mansion in the city home for just $75,000.
Detroit’s situation, while scary, can provide lessons learned for many of us if we haven’t already faced some financial crossroads in our lives. I know for me, here’s what I’m taking away from this ugly financial disaster.
Lesson #1 – Leverage and lack of diversification can be disastrous
Borrowed money to invest can be a smart move, but only if you have the financial security and income to pay it back. Leverage, especially in real estate, can be great when prices are rising but it can be a disastrous move when the economy is shrinking around you. My home is first and foremost a place for me to live. If my home appreciates greatly in value over time, that’s a bonus. Come to think of it, people depending solely on their home for their retirement nest egg are playing a dangerous game
. While leverage can provide great rewards it also comes with great risks. So, instead of leverage, I diversify my investments and I’m working on this all the time. I try to never bet the farm on any one thing.
Lesson #2 – Conquer debt before it conquers you
I wrote in a recent blogpost that overextending yourself can put you into a mess of constraints
. Financial independence comes with growing assets not growing liabilities. While some debt is “normal”, like borrowing money for your first home, I think it must be done in a measured way. By this I mean you should probably only borrow so much money as to absorb mortgage payments that are double or even triple your current payments since you nor I, can predict what the future holds. For everything else in life beyond the mortgage payment, we should probably try to apply the golden rule of personal finance: spend less than you make. At least if something bad happens to us, financially, we have a fighting chance. I continually need to work on this myself.