Thankfully over the last decade, we’ve recovered many of the 8.7 million jobs lost. Today, unemployment is just 3.9 percent — a far cry from 10 percent hit in 2009. Many of us improved our savings habits, too, bringing the overall personal savings rate up to 6.8 percent versus a pre-crash rate of 3.4 percent, according to the Federal Reserve Bank of St. Louis.
It’s tempting to let better times erase the bad ones from our memories. But there are some important takeaways from 2008 that we should do our best to hang onto for the long term. Here are three financial moves that the Great Recession taught us are almost always best avoided.
Lesson 1: Don’t always borrow the maximum amount the bank approves
In the years leading up to the Great Recession, it seemed like everyone thought they should own real estate — either a personal residence, an investment property or both. Because of no-doc loans (loans that did not require proof of income), aggressive appraisals and 100 percent financing, many homeowners wound up house rich and cash poor, explains Jocelyn Wright, adjunct professor at The American College of Financial Services. Then, when the housing bubble burst, they found themselves quickly underwater, in homes worth less than they owed.
To make matters worse, many individuals had borrowed to buy multiple homes, some of them with an eye towards “flipping” them, or buying and reselling a house within a year. In some areas of Florida and Las Vegas, nearly one in five homes were “flips,” according to Samuel Miller, senior investment strategist at investment advisory firm SEIA. When the crisis hit, many homes lost more than 50 percent of their value and lenders foreclosed on millions of families. “The American dream turned into an American nightmare,” Wright says.
“Above all, live within your means. Your first home isn’t likely your forever home, so make sure you are not overspending. Recognize that homeownership is not for everyone depending on your current situation. It may make sense to wait until you are in a better position financially before making what will likely be your biggest purchase,” Wright says.
Lesson 2: Don’t fall into the trap of wanting instant gratification
Before the crash, credit was too easy to come by, on everything from credit cards to mortgage loans. “We let delayed gratification fly out the window. If we wanted something and didn’t have the money, we simply bought it on credit,” Wright says. “We want to live like the stars we follow on Instagram, or like our old classmate we see on Facebook, but seem to forget the hard work and sacrifice required.”
It’s all too convenient to forget that what you borrow has to be repaid. Even a decade after the recession, many people are still rebuilding their credit, Wright says. Some who were faced with substantial debts during the crash were unable to put money in emergency funds, contribute to retirement accounts or save for their children’s college education, Wright explains. “In extreme situations, it may have cost people a new job, as employers will often check the credit of potential employees. Poor credit can have a personal impact, too, including depression, isolation and stress on our relationships.”
In a post-recession world, Wright says she hopes people are better equipped to distinguish between needs and wants. “Remember retailers are in the business of separating you from your money,” she says. “The ‘biggest sale of the year’ happens about every other month.”
Lesson 3: Don’t let market fluctuations make you do something you regret
Many pre-recession investors didn’t bother to look at their portfolios until after the markets had already taken a hit. They then panicked, sold and missed out on the market rebound in 2009 and beyond, describes Paul Gamble, CEO of investment strategy engine 55ip.
“Panic selling, following what everyone else is doing, and not looking at long-term portfolio objectives are just some of the behavioral hurdles that investors must steel themselves against if they’re going to be successful,” Gamble advises.
Smart investors need to have a plan that sees a way to stay in the market and ride out the cycles. “Whether you’re managing your own investments or have a financial advisor — which is highly advisable as we look ahead to the next 10 years — take a fresh look now at your portfolio,” Gamble says. Your advisor can help you develop a target asset mix that works for you, based on your risk preferences and financial goals, so you’re always diversified, and ready to weather the next storm.