By Matthew Theal, CFP®
Ten years ago in late September 2008, I moved to New York City. I was 22 years old and fresh out of college. I moved there to chase my dream of working on Wall Street. My timing was less than perfect as during that month Lehman Brothers had declared bankruptcy—the largest corporate bankruptcy ever.
The world was in crisis as the Dow Jones was plunging, home prices were cratering, and hardworking people were losing their jobs. I was lucky enough (i.e., cheap labor) to have found a job that month working as a financial journalist.
Covering finance during the great recession gave me tremendous lessons in personal finance. In a way, you can say I learned what you shouldn’t do. I think today on the 10-year anniversary of the great recession, it is essential to learn from the mistakes of others and see how we can improve our personal financial situations by making smart decisions.
Don’t Overextend Yourself Financially
If I could pick three words to summarize 2006 to 2008, it would be … TOO MUCH DEBT. Everyone leveraged up (took on debt) during that period, consumers bought homes they couldn’t afford, and banks lent too much money to people who couldn’t afford to pay them back.
For consumers, debt is like doing drugs. In small doses, it’s OK. Borrow some money to purchase a car, house, or education that’s acceptable. However, in large doses, debt will bury you, sending you to financial rehab (i.e., bankruptcy).
Most people’s financial problems stem from buying something they cannot afford. If it’s a home, don’t buy one where your payment will be much more than 25% of your income.
If you are putting a large purchase on a credit card and you can’t afford to pay the full bill next month, then you can’t afford to make the large purchase—so don’t do it!
It’s simple. Live within your means, and use debt as a tool to help better your situation.
Don’t Panic-Sell Your Retirement Portfolio
The biggest mistake individual investors make is to sell stocks when a market crash is happening.
If Target was having a 40%-off sale, would you run away from the store? Probably not. So why would you sell the stocks in your account when they are going down?
It blows my mind.
In fact, I saw a crazy stat the other day. During the 2008 crisis, the people selling stocks where the individual investors (that’s you), and the people on the other side buying them were the institutional investors (big Wall Street companies).
Instead of making changes to your portfolio, when the market does go down again, try increasing your contributions or your overall allocation to stocks. That way you are purchasing them on sale instead of paying full price.
Don’t Underestimate Your Job Risk
The final lessons from the recession are as an individual; your risk isn’t that your portfolio or your house will decline in value. That’s just paper money.
Your most significant risk is that you will lose your job.
During the great recession, more than 10% of hardworking Americans lost their jobs. Some of those people still haven’t found jobs or were forced to retrain in different fields.
Are you prepared to lose your job? Because more than likely during the next downturn in the economy, people will be out of work—it happens every cycle. As an individual, that is your most significant risk if the economy slows down.
The only way to combat losing your job is to have proper savings. As financial planners, we recommend our clients keep at least six months of expenses in a savings account for emergencies like the loss of a job.
The financial crisis was devastating for Americans economically and personally. And we know that one will happen again, as the economy moves in cycles.
It’s important to save, spend what you can afford, and stick to your investment strategy.