When Will We Ever Learn?
I am sure
you have heard the definition of insanity, but in case you have not the gist of
it is “doing the same thing over and over again and expecting a different
outcome”. Between the years of 2000 and
2008 America was flying high above the rest of the world and everyone was
prospering, at least it appeared that way.
The prosperity that majority of Americans were displaying was actually
an illusion. The reason is simple and
complex at the same time. During this
time there was a housing boom and everyone who could breathe or spell their
name was able to qualify for a mortgage.
Credit was flowing freely from banks and individuals as well as
companies could borrow to the max. If
people had equity in their home they would cash it out to buy cars, go on
trips, pay for college, start businesses, etc.
All majority of Americans did for these eight years was spend money they
didn’t have and live the illusion of the “good life”. Want to know what Americans didn’t do in
those eight years? SAVE!!! During the same period there were times when
the savings rate was in the negative meaning that people were spending more
money than they were bringing home in income.
Everyone thought this illusion of prosperity would continue, that their
home values would continue to rise, and that banks would continue to lend, but
then 2008 arrived and the magician revealed that the past few years was all a
trick and the unfortunate treat was upon us.
In 2008 the
economy collapsed and a snowball of catastrophes hit America from all
sides. The “why” behind the collapse is
complex, but a broad overview would be this: Banks were like the Americans
giving out more money than they had on hand and dealing in risky business practices. Banks gave mortgages to people who eventually
would not be able to afford them.
Homeowners mortgage rates started to rise and as an added insult
companies were laying off people left and right and so there was no income to
go to paying for the mortgages that these banks were so carelessly handing out
earlier in the decade. The banks being
so heavily invested in these mortgages started dropping like flies, the most
famous one being Lehman Brothers. I
still remember the night I was looking at CNBC watching the employees coming to
empty out their offices, such a sad sight.
Americans were losing their jobs, homes, cars, retirement savings, and
families. As a result of all this loss behavior
started to change. People went from
spending all they had to saving everything they could. In fact the savings rate
was at an all time high of 4.2% (of disposable income) in December 2009 and it
appeared that Americans had learned their lesson and had turned away from
habits of the past. You can say that the
insanity had disappeared, but not so fast as of February 2012 the savings rate
is back in decline (3.7%) and Americans are heading right back to the habit of
spending more than they bring home in income.
I am sure you are asking the question why would people go back into this
insanity? Why would people go back to
car loans, buying expensive shoes, going on trips, taking out home equity
loans, etc? The only answer that I can
come up with is that people are starting to feel safe again, because the
economy is improving and jobs are coming back, but that does not mean that you
should run right back to the edge of the cliff with your finances. We all have to learn our lesson from how we
felt in 2008. That uncertainty made us
change our habits and we have to resist the urge to go back. When the economy went off a cliff in 2008 a
month later I was laid off by Pfizer and my family was in $48,000 worth of DEBT. We had to change our behavior towards our
finances or become a casualty of the economy and another statistic. That is exactly what we did, we stopped
borrowing money and paid off everything.
We also built up an eight month emergency fund of expenses because we
are determined to never let the American economy affect our personal economy
again. If the economy ever decides to
take a nose dive again we will be ready this time. Insanity is NO LONGER welcomed at our home!
Have your
finances become a victim of insanity?
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