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5 Lessons Learned from the Recession

  • Deborah Nayrocker, M.Ed. Contributing Writer
  • 2011 7 Nov
5 Lessons Learned from the Recession

This has been an equal-opportunity recession. Its prolonged nature has impacted us in many ways. We’ll take a look back at lessons learned.

1. Jobs aren’t always secure.

Gone are the days when we can expect to retire from the same company where we began our career. It’s likely we won’t have the same job forever.

We’ve seen a higher jobless rate. The U.S. unemployment rate was the highest since the Depression, reaching a post-war high, according to The Economist. “Facing a collapse in global trade and consumer demand, firms slashed production and cut their payrolls to match. Employers are still cautious and weak demand will continue to limit new hiring,” the newspaper states.

The U.S. Bureau of Labor Statistics reports that more than 14 million Americans remain out of work. A contributing factor is that the U.S. now has more economic competition than it did in the 50’s and 60’s.

Along with job layoffs, employers are resorting to other cost-cutting measures. They are limiting work hours and cutting pay. An increasing number of employers are hiring temporary workers. This makes it a lot harder for families to pay their bills. Still, it’s been said, “The best way to appreciate your job is to imagine yourself without one.”

Economists say that the two most important indicators of economic health are GDP growth, over and above inflation, and strong employment.

2. Homes aren’t investments.

Homeowners bought into the quip that “home values only go up.” And it wasn’t just the homeowners who held this bullish sentiment. Investors, real estate agents, and mortgage brokers were in on the real estate boom. The House Price Index grew at the fastest pace in 25 years (Source: Office of Federal Housing Enterprise Oversight).

What factors led to this boom? There were three contributing forces, according to Martin Weiss’ Safe Money Report.

First, after 2001, the Federal Reserve began aggressively dropping short-term interest rates. Homebuyers jumped on the home-buying train while it went in their direction.

Second, many mortgage lenders became lax on previously prudent lending rules. Poor payment and credit history was overlooked. Down payments of 5% to 1% were allowed. Homebuyers got interest-only loans, where you don’t pay any principal for up to five years. Many interest-only loans had adjustable rates, or ARMs. Then, when faced with rising rates and bigger monthly payments, homeowners couldn’t cope.

Third, there was an influx of speculators and investors buying condos and other properties, with fewer primary homeowners. The housing boom was not supported by a sustainable demand. Then in 2008, the real-estate bubble burst. Since then, forced home sales to repay home loans are triggering lower home values and prices.

An economist for the National Association of Home Builders, S. Melman, said the housing industry is changing. “Value and need are driving the home purchase decisions, not potential investment value,” he said.

4. Debt comes with a price.

People with the “borrow now, pay later” philosophy learned that borrowing is costly. The borrow-and-spend cycle is unsustainable.

In the 2000s the answer to many of life’s problems seemed to be spending borrowed money. Want new clothes or a vacation? Use money borrowed on credit cards. Want better returns for your company or investment accounts? Use borrowed money.

The Economist states,  “Debt increased at every level, from consumers to companies to banks to whole countries. A survey by the McKinsey Global Institute showed that “average total debt (private and public sector combined) in ten mature economies…rose…to 300% [of GDP] in 2008.” A very large amount of leverage was amassed.

There comes a tipping point where one hits limits on the ability to absorb more debt. The signs are evident of excess public debt pushed to its limit for more than a decade.

Credit is not free money, It’s a liability to be repaid. The term credit comes from the Latin word credere, meaning “to believe.” Creditors loan money out, believing in good faith that they will be repaid. When that good faith is broken, creditors follow through to recoup losses and to refuse new lending. Banks cut back on available credit. Now consumers and businesses must make difficult choices.

4. Live within your means.

Not long ago, there was a massive expansion of easy credit. Consumers, those credit-worthy and less than credit-worthy, took the offer. They decided to buy first and find the money later.

S. Rees of the debt-management agency Vincent Bond explained what he’s observed. “Consumers’ attitudes have changed incredibly over the past 15 years. They have gone from aspiring to be just above their pay bracket to aiming a long way above their pay bracket,” he said.

A man making $50,000 a year and another making $200,000 a year found themselves in the same position. They were both living beyond their means. In his book Let Them Eat Credit, American economist R. Rajan explains that consumers managed to get by with both husbands and wives working and borrowing heavily.

The recession has forced people to examine the degree to which they’re living beyond their means. Moreover, having a desired level of spending, it’s difficult to go back to a more frugal lifestyle.

Many consumers have come to realize that basic needs come first. And they can live with less.

5.Save and prepare for the future.

Families were caught off guard with the prolonged effects of the recession. Without cash reserves, times got a lot tougher. After years of consumption, societies will need to be more focused on saving.

Savings fell to historic lows in the first quarter of 2008, according to the Bureau of Economic Analysis. Americans’ personal savings rate was the lowest since 1947, when it was first recorded. The Wall Street Journal reports that the savings rate had been declining for almost 20 years.

It seems more people worry about the future than prepare for it. A good motto to have is “save now, rather than starve later.”

What are two important steps to take?

First, build up an emergency fund. Most money-management experts recommend having three to six months of income saved for emergencies or transitions. When there’s a job loss, this cash cushion can be tapped instead of the 401(k) account.

Second, prepare for retirement. Take into account the time horizon, asset allocation, and having minimal fees. Plan for a comfortable financial situation.

As debt is minimized, savings can grow. With finances in order, it’s easier to be better prepared for life’s challenges.

Copyright 2011 Deborah Nayrocker. All rights reserved. Permission to reprint required.

Deborah Nayrocker is the author of The Art of Debt-Free Living and Living a Balanced Financial Life.