The 2008 financial crisis caused large-scale economic fallout. Here are four lessons to keep in mind from the Great Recession.
The recent barrage of negative headlines shows the weaknesses in our current economy. According to the Washington Post, inflation continues to soar, our strong labor market appears to be cooling off and many believe we are on the edge of another recession.
While the National Bureau of Economic Research has yet to declare an official recession, the USDA Economic Research Service forecasts higher prices well into 2023.
Looking to our history, specifically past recessions, can help guide the average consumer through this uncertain time. These top four lessons learned from the Great Recession of 2008 can help you better weather future financial storms.
Build an Emergency Fund
Establishing a rainy-day fund can help prevent consumers from falling into massive debt.
An emergency fund is a cash reserve set aside for unplanned expenses, such as a car accident, medical bill or loss of employment.
In 2009, the poverty rate increased dramatically due to the recession, with four million more people in poverty than the previous year, according to Russell Sage Foundation research. While it is unlikely housing prices will crash as they did in 2008, the rising cost of goods and economic uncertainty are reasons enough to take an emergency fund seriously.
For those who say, “Easier said than done,” the key is to create a plan and stick to it. Set aside any amount that’s possible, no matter how small. Pick a number, take that amount from each paycheck and put it into a savings account.
As for unemployed or debt-encumbered consumers, hardship programs are available. Many financial institutions provide options and help create a course of action for those facing economic hardship.
Financial Literacy Is Essential
Borrowing money is a normal part of life. Many people purchase a home with the help of a mortgage loan, fix up a home via a Home Equity Line of Credit, finance a vehicle or take out student loans for school. It is vital for consumers to learn the language of loans to make informed decisions that will impact their future.
The Great Recession led to a full collapse of the housing market, primarily due to large banks offering subprime loans with insufficient oversight and regulation.
However, it became increasingly apparent that consumer education and financial literacy, especially on loans, were severely lacking.
Although financial literacy has improved in recent years, according to a FINRA study, there are gaps in education that could lead some consumers to make poor financial decisions. Financial literacy education can lead to lower anxiety and pave the way for improved financial decisions.
The good news is there are more resources than ever available to improve financial literacy. Self-educate by reading personal finance books, reading blogs from our News & Knowledge center or listening to financial podcasts. If you lack the time or energy to increase your financial literacy on your own, seek advice from financial professionals. Many financial institutions offer financial literacy courses that cover topics such as household budgets, debt, building credit and saving money.
During a recession, some business sectors are still very profitable.
We learned during the Great Recession that equities do not do well during recessions. But not all stocks perform poorly during stressful economic times.
So, what does this mean? Stay calm and anticipate changes to come. Remember that right now is not the time to start emptying your bank accounts and selling all of your stocks. Consult with a financial advisor about the best investment opportunities for your circumstances before making any significant changes to your current investment strategy.
Do take time to read articles and stay informed. This will help you position yourself to be financially resilient during unpredictable times. This brings us to my final lesson.
A Recession Isn’t Forever
Like everything else in the world, what goes up must come down and what goes down will eventually go back up.
According to Forbes, the average recession in the United States lasts about 17 months. According to the National Bureau of Economic Research, a recession is defined as a significant decline in economic activity spread across the economy, lasting more than a few months.
The Great Recession lasted 18 months, although many felt its effects long after it was officially over. Likewise, according to the National Bureau of Economic Research, the COVID-19 pandemic caused a recession that technically only lasted two months, though the global economy continues to regain footing from consequential supply chain disruptions.
The possibility of an impending recession is scary and stressful. But the current economic uncertainty we face will pass.
By maintaining an emergency fund, increasing one’s financial literacy, remaining adaptable and remembering that a downturn won’t last forever, we can make it through to the other side prepared to work toward recovery.
Author: Cathy Graham is Desert Financial Credit Union‘s Executive Vice President and CMO. Most recently Cathy marshaled talent across the company through a transformational rebrand that included a new Mission, Vision and Values.