The Economy Didn’t Make You Poor – You Made You Poor

Help me I'm poor is a common phrase you'll hear in the current economy. Sadly, poor people normally make themselves poor through bad decisions. See how you can make the change from living poor to living a rich life on MoneyManifesto.com.The economy took a nosedive in 2008 and has since recovered despite what you hear in the news.

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.

Related: How Anyone Can Live On Half Of Their Income Or Less

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.

Related: How To Pay Off Your Debt When You Don’t Know Where To Start

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

Like What You See?

Join the other readers who have signed up for our email newsletter! No spam, just periodic updates to help improve your finances!

About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. Hi Lance, you know you are going to be accused of blaming the victim, don’t you? But I have to say I agree with almost all of your points. The one I don’t agree with in its’ entirety is living on half your income. I believe some people can but there are others whose income is really so low that it takes everything they earn to live. In looking at my own expenditures, I see areas that I could cut if I needed or wanted to reach that goal, but it wouldn’t equal 50% . There are other categories where we could cut, but it wouldn’t be wise, like our liability insurance, or our whole house generator maintenance contract. Overall, good advice.

    • I think blaming the victim isn’t really an issue. Opting to take out an excessive car loan over 6 or more years would be a choice made by the person, not a victim of the economy but I do see how some people would think that.

      As far as 50% of your income to live on, I do think that is extreme for most people. However, increasing income is always an option rather than cutting expenses. I think a lot of people could do well increasing their income in smart ways.

  2. A Financial downturn will have consequences for people….but just as recessions are temporary, so should be financial setbacks. People who are habitually in financial difficulty need to take a good hard look at their choices, decisions, and life direction.

    • I totally agree with what you say. I don’t expect most people to escape from a downturn unscathed, but using some of your emergency fund is much better than running up credit card debt. Hopefully most people can work toward improving their situation so the former, rather than the latter, is the option.

  3. Although I agree with you that many people become or remain poor due to poor personal choices not because of a lousy economy, some people don’t fit these categories.
    I know of people who were bankrupted through no fault of their own by medical debt after a severe illness or accident.
    I know of others who lost over 75% of their retirement funds right as they were set to retire because their portfolio tanked.
    Unless they have extraordinary luck, these older folks will never be able to recover those funds back to pre recession levels.

    • Medical debt is normally the cause of not having insurance. With the affordable care act, insurance can be expensive, but it is less expensive than having a huge accident that bankrupts you. As far as losing 75% of their portfolio right before they retire, those people clearly did not have a proper asset allocation that matched their risk tolerance and goals. If you were just about to retire, there is no way you should have been in something that could lose 75% of its value. It is hard to see these things before they happen, but the majority of them are preventable.

  4. I do think that some things are out of a person’s control, for example loan interest rates. If I wanted to go to college, which I did, I had to take out loans at an extremely high interest rate.

    • College seems like loans are the only way if you want to go right after high school and we made the same mistake. My wife had over $80k of student loans at crazy interest rates, too. I wish I could go back and change that but we can’t. However, I highly suggest people work to pay for part of college, apply for a ton of scholarships and only take out the minimum amount of loans. College choice can also save a ton of money if you pick a more affordable college close to home.

  5. There were plenty of young people who bought a small home on the low end of market prices at prices that would look inflated today — not because they wanted to be extravagant, but because there weren’t cheaper options available — lived on half or less of their income, and who still lost their home as a result of the housing crash and ensuing unemployment crunch.

    The Great Recession was a once-in-a-century catastrophe. Even in hindsight, there aren’t too many economists out there who think the longest recession since the Great Depression was a normal part of a “predictable cycle.”

Share Your Thoughts

*