The recovery hasn’t brought everyone back to the same financial position they were in before the crash, but overall, our country is ahead of where we were before everything went downhill.
Unfortunately, I still hear people constantly complaining about how the economy has ruined their finances. They say the economy has dealt them irreparable damage and they’ll never be able to recover.
While a down economy can hurt individual finances, you must take ownership for what has happened and how you prepared for the downturn. The economy didn’t make you poor. You made you poor.
Our Economy Has Predictable Cycles
Our economy goes through a very predictable cycle every few years. First, our economy grows. It may grow slowly at first before accelerating to grow even faster later. Eventually, growth starts slowing down and we reach an economic peak.
Once at the peak, the economy starts slowing down, even if we don’t immediately realize it. Next, the economy starts decreasing even faster and we enter a recession or a depression. Finally, the economy will reach a bottom and the cycle will start over again with growth.
This cycle isn’t hard to predict at all. What is hard to predict is where exactly we are in the cycle and when the top and the bottom of each cycle will be. However, armed with the knowledge that the cycle happens over and over again, people should be smart enough to prepare for the recessions when times are good.
Unfortunately, many people never do prepare for the down times and live life to the limit while times are good. This ignorant behavior is what makes you poor, not the economy. The economy is predictable so why don’t we do a better job of preparing for the lean times?
Actions That Make You Poor During The Boom Times
When the economy is booming, sometimes it seems like the good times will never end. People get comfortable with their finances and assume things will continue to get better forever.
Based on this false assumption, people begin living on money they have not yet earned at a time when they should be preparing for the coming downturn. This action is what makes people poor.
Here are some specific actions that will make you poor when the next downturn becomes apparent.
Spending As Much Or More Than You Earn
Spending as much or more than you earn will put you in the poor house when the economy takes a nose dive. Spending more than you earn means you’ll be taking on debt either through credit cards, car loans or excessive mortgages.
Even spending just as much as you earn will make you poor, because that means you aren’t saving for an emergency fund or retirement. Without these key tools, you’ll be poor during the next recession as well as when you can no longer work and should be able to retire.
Don’t fall victim to this cycle. Spend less, and hopefully significantly less than you earn.
Avoid the following actions so you won’t end up poor during the next recession.
- Racking up credit card debt
- Taking out a car loan
- Relying on future income to finance a nicer life
- Buying a home that maxes out your budget
- Spending emergency fund money for non emergencies
- Spending money that should be saved or invested
How It Works
Here’s a quick story about how you would become poor during the next recession by doing the things above.
When the economy heads for the worst, you could easily lose your job, have to take a pay cut, or run into one of many other financial pitfalls. You won’t have the buffer to ride out the storm without taking on even more debt on top of the debt that is already suffocating you financially. After all, you’ve already maxed yourself out with a huge home loan and a luxury car loan.
By the time the economy recovers, the only way you’ll participate in the growing economy will be paying off the debt you incurred toward the end of the boom and all of the way down through the bust just trying to stay above water.
Then, when your debt is finally paid off, the economy may be booming again and trick you into taking out debt again just in time for the next recession.
How To Prosper Financially – Even During Recessions
Now that we all know about the predictable economic cycle we all live through every few years, it makes sense to prepare for it. By preparing for the next downturn during the boom times, you’ll be able to ride out the recessions without your finances taking a major blow. Here’s how.
Spend Less Than You Earn
Spend less than you earn so you can survive a pay cut or even a job loss. If you and your spouse both work, hopefully you could even live on one income instead of two without cutting back too much. During the boom times you can take this extra money from spending less than you earn to prepare for the next steps.
Pay Off Consumer Debt
If you have consumer debt, you’ve been living based on money you don’t currently have. While the economy is booming and you’re raking in the money, take this time to pay off your consumer debt.
Pay off your high interest rate credit card debt, pay off your car loan and even pay off your student loans if they aren’t at a low fixed interest rate. You can start on the next step while you’re paying off your debt, or begin it after you’ve paid off your consumer debt.
Build an Emergency Fund
Save enough for a true emergency fund in the boom times so that you can outlast the recessions. Spending less than you earn will allow you to squirrel away money every month until you eventually build up anywhere from three to twelve months of expenses in cash, depending on your situation.
Combine the emergency fund with no consumer debt and you’ll be in great shape when the next recession hits.
Always Invest for the Future
Once you have a full emergency fund, or even while you’re building your emergency fund, you should be investing for your future. The key with investing is to make sure that you continuously add to your investments over time. That means investing during the downturns as well, since you’ll be able to buy investments on sale.
You should be able to continue investing during recessions due to the fact that you spend less than you earn, you don’t have consumer debt and you have a full emergency fund to sustain you should you lose your job or run into a different emergency during a recession.
The investments you buy on sale during recessions will help you grow your wealth more than any other.
How It Works
Here’s a quick example how the above actions help you stay ahead of the game during recessions.
You work hard to spend less than you earn during the booming economic years. Due to the extra effort, you were able to pay off your consumer debt and build an emergency fund. Now you invest regularly.
The recession hits and your pay ends up being frozen. Luckily, that isn’t a problem since you’re living below your means. In fact, you’re still able to continue investing while investments are on sale.
The economy begins to recover and you escape unscathed. In fact, you notice your wealth has grown as the investments you bought on sale during the recession are now worth more.
While you may not be able to complete all of the actions above during just one economic boom, continue working toward these goals and you’ll eventually get to the point where you will prosper, even during recessions.
The economy doesn’t make you poor. The cycles the economy goes through are predictable, we just never know when they will happen. Prepare now and you won’t end up poor at the end of the next recession.
Do you think the economy makes people poor? Or that people don’t make smart financial decisions during the boom times that makes them poor during the recessions? Let me know you thoughts in the comments below!
Photo by: bradleygee Text added by: Lance Cothern