Wednesday, May 13, 2009

This Recession has been a Wake Up Call

The 2007 - 2008 recession has been a wake up for many people, including those with good personal finance skills.

Not surprisingly, the recession has been a wake up call for those that have been living beyond their means. For example, Americans Are Saving More, Spending Less reports that the saving rate has increased 2.9% of after tax income during the final quarter of 2008. In addition, data from the Federal Reserve show people are using credit cards less as revolving debt fell by $11.1 billion in March, 2009, a percentage drop of 5.2%, the largest since December, 1990.

However, this recession has also been a wake up call for people fully invested in the stock market, especially those in diversified equity index funds. Typical financial plans used 8-10% long term returns in the stock market, but 2008 showed that short term returns could be negative, even to the extent of -35%. Although I haven't seen any data, I suspect more retirees are now holding funds for near term expenses in cash, bonds/CDs or money market funds.

Finally, this recession has revealed numerous financial scams, which guaranteed high investment returns. Many of the investors affected had otherwise good personal finance skills. They just trusted the wrong person to manage their money, and once again showed that "if it's too good to be true, it probably is."

Hopefully the economic situation has bottomed and there will be no additional wake up calls before the turn.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2009 Achievement Catalyst, LLC

No comments: