You have probably seen headlines and heard reports that while there are still a variety of challenges ahead, the Great Recession is officially over. What is certain is that we have an opportunity to reflect on the lessons that can be derived from the financial pain of the last few years. I am reminded of the message from Winston Churchill, who once said, “Those that fail to learn from history, are doomed to repeat it.”
Hopefully you are seeing your own personal finances rebounding, so now is the time to implement some practical steps to reduce the probability of surprises in the future. Here are some key recommendations to get the process started:
- Step up your own financial education. A recent survey by the National Foundation for Credit Counseling found that over 40 percent of U.S. adults still give themselves a grade of C, D or F on their knowledge of personal finance. It’s time to pay more attention to those night courses at your local college, articles on the Internet, and the free seminars you skipped in the past in favor of your favorite TV show.
- Pay the same education forward to your kids. Another recent survey by Charles Schwab of 18-year-olds reports that only 39% claimed to be “knowledgeable about how to manage a credit card” and only 32 percent say they know “how credit card interest and fees work.” Teenagers learn primarily from their parents, so make sure you are spending the time and effort required to be the role model and education provider they need.
- Create a plan for your income and spending. A spending plan will empower you to be informed and take control of your finances. This may seem easier said than done, but it is worth the effort and dedication. Check the Internet for examples of budgets at all income and family size levels. Seek help from local banking and financial professionals as required for personal problem areas. Discipline and determination are key ingredients. Are there ways you can reduce consumption of utilities and gas? If you eat out frequently, cut back and watch your savings add up.
- Restore your savings account. Unfortunately, personal savings rates have declined over the past few years, to nearly zero prior to the recession. A good rule of thumb is that families should have at least six months worth of emergency savings in the bank. Unexpected expenses come up even during good economic times, and if you’re reserve is zero, a sudden large expense can upset the most carefully-planned budget.
- Be penny-wise while having fun. Join the spending ranks of millionaires, who are notorious penny-pinchers. Deals continue to abound as retailers compete for precious consumer dollars. Don’t fall back to the old habits of just grabbing the first deal, and thinking your plastic will cover it. Remember, being penny wise makes you smart, not cheap.
- Pay off credit cards and keep monthly balances at zero. Having a credit card with a zero balance will help you build your credit score, give you financial confidence, and is always useful in case of an emergency. On the other hand, if you can’t afford something, save up for it rather than burdening yourself with the additional cost that credit card use can often bring. A little patience will pay off big!
- Set goals and celebrate when you achieve them. Before the recession, you may have forgotten the line between needs and wants. Maybe you don’t really need that 60” LCD TV, and you can hold onto your old car longer, rather than race out to buy a new vehicle. Put aside a fixed amount each month for your son’s college tuition, and your retirement later.
- Seek out opportunities for professional development. Keeping your skills and computer literacy up to date make you more valuable to your employer/those you work with and make you competitive for new opportunities. Take advantage of employer education perks and if you are able, work overtime or evenings. Your extra effort will translate as a commitment to your work and others will take notice and be more committed to you!
The good news is the recession has actually opened up many new opportunities for entrepreneurs and new jobs for professionals. Many other people have been shocked out of entitlement into action, and young people (Gen-Y) are showing a new determination to throw off outdated business models and change the world.
Yet making good financial decisions is still up to you. It’s a choice that we can all learn to be more alert, more creative, and more focused on tradeoffs, especially short-term desires versus long-term consequences. Use the lessons of the recession to avoid any repeat of old financial pains, and even remove the term “recession” from the vocabulary of future generations.
To Your Success!