My first job out of college was as a bank auditor. The timing? Not great. I found myself auditing investments during the financial crisis of 2008. What would have otherwise been a pretty dry job was all of a sudden the focus of a global financial meltdown.
I still remember the morning Lehman Brothers collapsed. I walked past the trading floor of one of my clients and the mood was as if the world had come to an end. To be honest, I didn’t fully understand what was happening, or why, but I knew that the lessons coming out of that year would stick with me for life.
While our economy and confidence has seemed to recover from the low point over eight years ago, there are some basic important lessons that shouldn’t be lost. Here are a few:
1. Learn to live on less.
Before the crisis we had seen a relatively long period of financial prosperity and it felt like the norm. People were living larger, more lavishly, and stretching themselves beyond their means. One of the most shocking statistics to from this time of economic prosperiety? Personal savings rate was below 2%. This means that, on average, people were saving less than 2% of the paycheck they were bringing home—which is why there was such a massive problem when the economy went south. Very few people had anything in the bank to fall back on.
Though this advice is basic and something that you read about in almost every financial article, the recession brought this into the spotlight: You need to live on less than you make, and budget, save, and have an emergency fund to fall back. This is crucial for your personal financial stability. Things can go wrong unexpectedly and you need to have a cushion to protect you from the fall.
2. Have a backup plan.
During the recession many people found themselves not just out of a job, but out of a career. Companies went out of business and the ones that were able to remain found ways to do more with less. It was a real eye opener to know job security was not a given and even if you worked hard in your current role, nothing was guaranteed.
The biggest lesson here is to always have a plan B. It’s frightening to think that your current industry may one day no longer be thriving, but it’s good to be prepared for this situation. My advice? Don’t let your skills get out of date. Continuing to improve yourself and build knowledge makes you much more marketable when jobs evaporate. You can take classes online or at a local school, pick up a hobby in an industry different from yours, or volunteer for an organization that interests you. As a bonus, you may even find that you have a real passion or talent for something other than what you’re currently doing.
3. If it seems too good to be true, it probably is.
As I remember, right before the crash it felt like people couldn’t lose. Home prices were soaring, credit was easy to get, and there was no end in sight. Some of my friends had purchased multiple houses without a down payment or an interest-only loan. Others were killing it with “guaranteed returns” on investment portfolios. It felt too easy and too good to be true and, in retrospect, it was.
This doesn’t mean that you need to be wary of every upturn, but don’t fall for easy money or guaranteed returns. Listen to your gut and if it’s saying that something is amiss, listen.
4. Experts know some things, but not everything.
We put a lot of value on the opinions of experts and usually, rightfully so. They’ve spent the time to research, they have a deep knowledge about a certain subject, and we listen to their opinions. We hire them to give us advice, manage our money, and then often blindly follow what they recommend.
But it was clear coming out of the recession that experts don’t know everything. Putting your blind trust in an expert is putting your fate in someone else’s hands. Listen to their advice, but make sure to also do your own research—stay in the driver’s seat when it comes to your money.
5. You shouldn’t buy what you don’t understand.
I will admit that I’m one of those people who will check the box on terms and conditions when I’m buying something small without actually reading them. (I’m sure a lot of you also do the same.) But when it comes to a bigger purchase like a home? You need to understand exactly what you’re buying.
During the recession a lot of people were caught off guard when the interest rate on their mortgage suddenly went through the roof and they could no longer afford the payments. And I completely understand why.
The acronyms and general casual attitude (at the time) about adjustable rate mortgages and balloon payments made it seem unimportant to understand the nitty-gritty of what was included in mortgage documents. And by the way, those mortgage documents aren’t really what I would call light reading.
But when you’re making such a big financial decision you shouldn’t hesitate to ask all the questions you need in order to be sure you fully understand everything you are signing up for. Just like we learned in elementary school, there’s no such thing as a stupid question.
What lessons will stick with you from the financial crisis?