The Most Important Financial Lessons We Learned From The Great Recession
The Great Recession spanned the late 2000s to the early 2010s and impacted individuals from all over the globe. The primary cause of the recession was a financial crisis in the United States which stemmed from the sharp decline in the real estate market from 2007 to 2008. Read on for facts about the Great Recession and the most important lessons we learned from it. You'll find valuable tips on how to prepare for another economic downturn.
The Great Recession vs. The Great Depression
The Great Depression, which occurred during the 1930s, resulted in an unemployment rate of as high as 25 percent, along with a decline of approximately 10 percent of the gross domestic product.
While the Great Recession was a serious financial event that impacted hundreds of millions of people, most economists agree that it did not reach depression level. However, during the Great Recession, unemployment reached nearly 10 percent and the United States gross domestic product declined by 2.8 percent in 2009.
What Happened During the Great Recession?
The phrase “Great Recession” means something different to everyone, primarily based on their location. In the United States, for example, the phrase applies to the recession that lasted from December 2007 to June 2009.
However, this was followed by a global recession that impacted individuals in many parts of the world. The economic downturn began when the United States' housing market blew up, resulting in a large number of mortgage-backed securities losing value.
Was It Avoidable?
Hindsight is 20/20, but many people believe the Great Recession could have been avoided. In fact, a report by the Financial Crisis Inquiry Commission noted that the recession was, indeed, preventable.
The report made note of several failures, including the government’s inability or unwillingness to regulate the financial industry. It also touched on the large number of firms that took on too much risk, as well as excessive borrowing by consumers in order to purchase homes they were unable to afford.
Recovering From The Great Recession
As a result of the Great Recession, the United States Government, including the Federal Reserve, took action to prevent additional damage to the global economy. This included but was not limited to providing banks with trillions of dollars in emergency loans, lowering a key interest rate to promote liquidity, and passing the American Recovery and Reinvestment Act.
While all these steps, among others, were critical in putting the economy back on the right track, many individuals' finances were left in shambles.
Lesson: Always Prepare for the Unexpected
No one wants to look at the future and consider the fact that it can change for the worse, but it’s the responsible thing to do. Some people saw the Great Recession coming, but many were looking the other way. They never believed it could be as bad as it was.
If you lived through these years, it’s critical to understand the importance of preparing for the unexpected. It’s this line of thinking that will help you weather even the most severe financial storms.
Lesson: Don’t Borrow Just Because You Can
When the economy is booming and you’re feeling good about your finances, it’s easy to fall into the trap of borrowing just because the money is available to you. This is what got many homeowners into trouble in the years leading up to the Great Recession. They took on a mortgage they couldn’t really afford, which eventually resulted in foreclosure when the recession hit.
The bottom line: borrow what you need and what you can afford. Don’t borrow what you qualify for.
Lesson: Real Estate Doesn’t Always Appreciate
The Great Recession taught us that real estate doesn’t always appreciate. As real estate prices took a dive, homeowners who needed to sell realized that they were underwater. Not only did this put stress on these homeowners, but it did the same to the banks that made the loans.
Generally speaking, real estate appreciates over time. But that’s anything but a hard and fast rule, as the Great Recession proved.
Lesson: Stock Prices Aren’t Steady
Don’t let anyone tell you the stock market is a steady investment. Sure, you’re likely to make money over the long haul, but stock prices can take a dive without notice. Between October 2007 and March 2009, stocks plunged by 57 percent, thus resulting in big losses for many investors.
During this 17 month period, the prior 12 years of gains completely disappeared. Now what do you think about the steadiness of the stock market?
Lesson: Invest In The Stock Market During Down Times
Earlier, we noted that the stock market sunk by nearly 60 percent during the Great Recession. That’s a big, scary number. If you’re able to do so, continue to invest money when the stock market takes a downward turn. Investor Warren Buffett says it best: “Be fearful when others are greedy and greedy when others are fearful.”
This doesn’t mean you should invest all your money in the stock market during downtimes, but you shouldn’t completely shy away either.
Lesson: Your Job Is Priority Number One
Surviving a recession is difficult enough if you have a steady paycheck. But if you don’t, you’ll find it next to impossible to stay afloat. Your job is priority number one in regards to your finances, as you need a steady flow of income. Without this, you could find yourself raiding your retirement accounts to make ends meet, thus impacting your ability to retire when you want.
If you don’t have job security, find it. There’s no guarantee you won’t lose your job in the future, but you can do your best to protect against this.
Lesson: You May Need to Help Loved Ones
The Great Recession proved that helping others is what people do best. When the economy suffers a downturn, you first need to do what’s right by you and your immediate family. However, it’s not out of the question that other loved ones will need help too.
For example, if your children recently graduated from college and are finding it difficult to secure employment, you may want to step in to assist them. By preparing for the future, you position yourself to help others.
Lesson: Don’t Try To Keep Up With The Joneses
Regardless of economic circumstances, keeping up with the Joneses is a game you don’t want to play. Your neighbor buys a new car, so you do the same. Your neighbor buys a vacation home in the mountains, so you buy one at the beach... you get the point.
Keeping up with the Joneses resulted in many people overextending themselves before the Great Recession. And then when it hit, they were out of luck.
Lesson: Experts Aren’t Always Right
Some saw the Great Recession coming, but most felt it in some way upon its arrival. It’s okay to listen to experts, such as industry regulators, accounting firms, and government officials. However, don’t assume that everything they say is factual.
Many so-called experts underestimated the power of the Great Recession, which gave people false hope. As you listen to the experts, let your personal knowledge and gut feelings guide your thinking.
Lesson: Invest In What You Understand
It’s easy to get caught up in investments you don’t understand. You see people making money in penny stocks and you dive in headfirst. Or maybe you come across a real estate course showing how to make money flipping homes.
It’s okay to experiment with new investments, but don’t get ahead of yourself. When you invest in what you understand, you’re confident in the decisions you’re making and the future you’re building for yourself.
Lesson: Reduce Your Debt Load
You may be able to afford to carry a large amount of debt when the economy is booming, you have a good job, and the markets are steady. However, when things change, such as what happened during the Great Recession, too much debt can drown you.
If your current debt load is too large, begin to pay it down in anticipation of a future downturn. And if the economy remains strong, you’ll still be happy about the fact that you reduced, or maybe even eliminated, some or all of your debts.
Lesson: Diversify Your Investments
One of the biggest lessons learned from the Great Recession, many people were hit extremely hard because they neglected to diversify their investments. Anyone who tied up all their money in real estate took a hard hit.
The same holds true of those who were all-in on the stock market. Diversifying your investments today will help keep you financially secure in the event of another recession. This is one of the top takeaways from the Great Recession.
Lesson: Consult With A Professional
When everything is going well with your finances, you assume that you’re in full control. You also assume you don’t need help from anyone. The Great Recession taught us that the economy can quickly take a turn for the worse.
Consulting with a professional is one of the best ways to protect against trouble. For instance, a financial planner can review your plan to help you determine if you’re prepared for anything that could happen in the future.
Lesson: Trust Your Gut
If it sounds too good to be true, it probably is. If you’re nervous about making a particular purchase, you should take a step back and think it through. For example, one of the primary contributors to the Great Recession was mortgage lenders providing loans to borrowers who couldn’t really afford them.
While much of the blame should be placed on lenders, borrowers have an obligation to make sound financial decisions. So, in the future, trust your gut.
Lesson: You Need an Emergency Fund
When money is tight, it’s nice to know that you have somewhere to turn for funds. This is where an emergency fund comes into play. For example, if you have six months of living expenses stocked away in a savings account, you’ll have peace of mind in knowing that you’re financially secure -- to a certain degree -- in the event of a recession or any other type of emergency.
Many people without emergency funds were hit hardest during the Great Recession, as they had nowhere to turn for the money needed to stay afloat.
Protect Yourself Against A Future Recession
It’s your hope that you never have to live through another recession, but there’s no way of knowing what the future holds. We learned a lot from the Great Recession, and it’s critical to put these lessons to good use.
When you combine this knowledge with proper preparation, you’ll position yourself to best deal with any downturn that hits the economy in the future. You can’t control what happens, but you can prepare yourself.
