Students entering college will be leaping into lectures steered around the struggling economy. Businesses will continue to make budget cuts and perhaps downsizing decisions until we start to see brighter days on Wall Street. And within our own family budgets, we'll most likely continue to plan our finances based on the grimmest of possibilities until we begin hearing and reading positive forecasts. Every generation needs to be aware of the consequences of taking financial risks, and we're quickly learning how to become more financially responsible.
The five most important things we'll take away from this just may be:
1. Frugal isn't a four-letter word. In a matter of months, our national savings rate went from fumes to more than 4%. People got the message that living beyond their means isn't smart when those means can be snatched away overnight in a layoff. Even if you keep your job, the prevalence of pay cuts and furloughs makes it clear that you can't count on an ever-expanding paycheck to make up for careless spending.
2. Lenders are not your friends. You'd think it would be obvious by now, but too many people are still shocked when their lenders treat them poorly by slashing credit limits, jacking up interest rates or dragging their heels on loan modifications.
3. Everything involves risk. Until they happened, the twin crashes of the stock and real-estate markets were inconceivable to many of their participants. Real estate was supposed to go only up; stocks might drop once in a while, but values were supposed to recover fairly quickly. Now that everyone knows better, some have taken the wrong message and decided that taking no risk is better than taking any risk. Better than trying to hide from risk is understanding and managing risk. For most of us, that means continuing to invest in stocks and stock mutual funds for long-term returns but leavening those riskier investments with bonds and cash.
4. It pays to have good help. People have some odd ideas about the role of a financial planner. Many think that these advisers should somehow help their clients consistently beat the market in good times and avoid all losses in bad times. Sorry, but that's impossible. The real role of a good financial planner is to take a look at your entire financial situation and make sure you have an appropriate portfolio given your age and risk tolerance. A planner should educate you about the hazards and rewards involved with investing, advising restraint in the good times and perseverance in the bad.
5. This, too, shall pass. The economy will change. Some jobs and even industries will disappear, but others will be created. The U.S. economy is almost unimaginably huge and diverse, able to withstand blows bigger than the ones it's been dealt. Some amazing businesses will be born in this recession, businesses that will create jobs and opportunities. If you learn the right lessons from this recession, you'll be ready and waiting for them.
