The global recession we are going through affected many people. In fact, it is stated as one of the worst recessions to hit the world since the Great Depression. Now I’m not sure about you, but I definitely don’t want to witness, let alone be a part of the next great depression. What’s done is already done, but I’m not going to contribute to the next downturn. Here are a few of the lessons we need to remind ourselves so we don’t help create the next recession.
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Don’t buy that Porsche 911 Turbo if you make $35,000 a year.
Seems a little bit obvious, but living beyond their means is a major issue for many people. So many use their credit cards without thinking about the consequences, spending lavishly and unwisely. The U.S. alone has $962 billion in credit card debt. Spend less than you earn and put some away in a savings account. You never know when a rainy day will come… -
There is a storm outside, where is your umbrella?
Have you setup an emergency fund for your family? Let’s say you lost your job today. Do you have money set aside? Your credit card doesn’t count; technically using your credit card during a rainy day/month would only make the situation worse. The financial crisis showed us that credit we always thought would be available (even for pre-approved credit lines) isn’t always guaranteed and we should never depend on it. Try and put away 3 to 6 months worth of total expenses in a savings account. Call this an emergency fund. -
Company Stocks: “Makes me look loyal to management and dedicated to the company”.
Is your 401k heavily based on company stocks? You might want to pull out half or a quarter of the stocks you are holding. Sure, you may think that owning stocks in the company shows that you are dedicated. Heck, you are technically an owner in the company! But what if the company goes belly up? Will you have enough of those penny stocks to put food on the table for your family? Cash out at least a quarter of your stocks and diversify. You were going to leave them in the stock market anyway, why not spread your risk? -
Save what you earn.
Simple enough but tons of people don’t save at all. This is different than an emergency fund. A portion of each and every paycheck you receive should be deposited into a savings account. Put some of your pay into an online savings account (after you pay your monthly expenses), and invest the rest. -
If I only had a couple thousand dollars…
At the beginning of the recession when all the big companies stocks took a major hit. A light bulb went off in my head, I could buy all these blue chip stocks on sale (Bank of America comes to mind) and hold onto them for 5 to 10 years, easily double my money when the recession is over. Like most people, I wasn’t prepared for the recession and didn’t have the cash available. Plus, I was terrified certain companies I wanted to invest in were going to file Chapter 11. I ended up dipping my toes in the stock market, and bought some GE stock. Just because it is all doom and gloom out there doesn’t mean there isn’t opportunities available. Caveat: Make sure you understand the risks of buying a stock that has taken a major hit. Those who bought GM stock when it went down is practically wiped out. Sometimes, a stock is cheap for a good reason!
There are always options available to you, depending on how you look at it. We can only learn from our mistakes if we can highlight what they are. Hopefully some of these tips will help you in the future, because a recession is inevitably going to hit us again.
This is a guest post by Bank Guru, a contributor for a financial blog in Canada, banknerd.ca. He is passionate about the banking and financial industry. He believes that consumers aren’t being informed properly and educated enough in personal finance, and he wants to help. You can find Bank Guru at banknerd.ca or you can contact him at bankguru@banknerd.ca.
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{ 12 comments… read them below or add one }
Yah, I feel like we are all prepared for the next one and can’t wait. But, even though we think that we’ll know when it hits rock bottom, when the market is low, will we really be willing to invest our money in cheap stocks? Or will we have the same worries. I bet in 30 years when this happens again, Americans will be just as shocked an unprepared.
I don’t think there’s really a way to see the bottom. The only predictable ways to invest in stocks are either:
a) invest regularly and bet that the long term trend of the market is up
b) invest in companies that are undervalued through research and stop worrying about short term valuations and volatility.
Note that obviously, (b) requires much more skill (and time) than (a).
Why wouldn’t you want to witness a depression? Economies go up and economies go down. You can’t control that. Not wanting to go through a depression is like saying you don’t want to have any rainy days. That’s not how the world works.
As far as buying Bank of America, that may have not been such a good idea. BofA bought Countrywide, America’s largest and most troubled lender. If the government had not intervened with hundreds of billions of dollars of bailout money, I think Bank of America would have gone bankrupt.
I like your other points, though!
It would’ve been a tough sight to witness if the government didn’t intervene AT ALL. We would’ve seen AIG and Citigroup go bankrupt first, and possibly many others as there’s a domino effect based on the fact that each company does business with one another.
Before you know it, ALL financial institutions COULD have failed (if you don’t think this was possible, imagine companies losing several major customers and interbank lending and borrowing capabilities). And with no lending, every other business sector would have collapse because 99.9% of all businesses borrow money.
Good points. An emergency fund is job one in an up or down economy.
You’re not kidding, we thought the good times would keep getting better and last forever!
John DeFlumeri Jr
The problem with saving is that many people are living paycheck to paycheck in order to support their family. However, if we all reassessed our budgets here and there I’m sure there would be some money to put in the savings account at the end of the month. For 2010, I plan on saving $100 more each month than what I usually save even if that means missing out on a fancy dinner social with my friends.
Good concrete plan, as those are the ones that will be met.
Good luck with your savings goals and may your income jump a little bit to help with that as well!
#5 – A lot of people EASILY lost a lot of money trying to pick a bottom. It’s much harder than you think.
#1 -Can I buy the porsche turbo if i get a really really big bonus this yr?
I say get it if you can clearly meet your $3 million goal even if you use conservative numbers.
Otherwise, then don’t get it and meet your goal first. You can wait a few years
#5 – I would agree with you on that one. It is hard to pick the bottom… I was (and should of mentioned) it is for more long term people. On average a majority of the stocks have been down in 09. Arguably, picking up a couple good blue chip stocks and holding onto them for 10 or 20 years would be the best solution.
#1 – http://www.lasvegassportscarrentals.net/wp-content/uploads/2009/07/white-porsche-911-gt3.jpg …sexy
Those who were debt free and live well below their means, with little need for materially things, went thru this recession personally pretty much untouched.
I did see it affect those around me who were not debt free – but for me personally, I weathered it just fine… actually, except for the news, I barely knew it was happening. My (very low) standard of living did not change at all. So I guess it just depends on one’s outlook, and if one is debt free. When one has little needs, and few wants, it is easy to get by unaffected by the outside storms. May you all find that peace and security