The Scary Truth About Americans and Their Money
The root cause of this economic catastrophe is the same as in 2008, but are we ready to change our ways to avoid it in the future?
I just recently read a headline that within 3-weeks, around 16 million Americans have lost their jobs and filed for unemployment. This unemployment number is shocking. How did we go from the best job market in US history to this?
Before you begin to think this is a political article… NO, there is not a single person or company to blame for our current circumstances.
The last time we experienced a worldwide economic slowdown was in 2008 with the Great Recession. The Great Recession and the COVID Collapse are different in what triggered them, but the same underlying problem remains.
The Cause of Our Two Most Recent Downturns
In 2008, our economy fell apart because of a housing crisis. Banks were giving loans to people that had less than optimal credit. The term is called sub-prime mortgages. The inability of these people to pay off their mortgages had a domino effect on the rest of the economy that almost brought our entire economic system to ruin. If you want a more in-depth explanation of what caused the Great Recession, I recommend you watch The Big Short, starring Christian Bale, Steve Carrell, and Ryan Gosling.
In 2020, the widespread transmission of the novel coronavirus and subsequent government-mandated shutdown has brought our economy to a screeching halt. The forced shutdown has caused many businesses around the country to lay-off or furlough many workers, which is causing a surge in federal unemployment claims to levels not seen since the Great Depression. I don’t mean to sound the alarms, but people do need to understand the severity of this.
These two events seem incredibly different on their surface, so you may be wondering what they have in common.
The Scary Truth
In both of these circumstances, the majority of Americans were not ready for a downturn. No, I do not mean more Americans needed emergency supply kits and more toilet paper. American workers and many American businesses could not weather the storm financially.
The reason government officials and economists are worried right now is that they know how bad people’s finances are and are scared the house of cards is about to collapse. The household debt in the US has topped $14 trillion.
This number means most people are financing their lives and businesses with debt, not savings. People are living like nothing bad could happen. This lifestyle becomes an issue when their income for whatever reason drys up, like right now. What happens to that debt people can’t pay? It causes a domino effect of economic catastrophe for anyone else in a similar situation.
Recessions Are Garage Sales For the Rich
When the economy goes into a Recession or Depression, everyone is affected. Even people who have been saving and preparing for this event are affected. However, the difference is that these people will continue to be able to pay their bills without having to tap into high-interest financing solutions, like credit cards and bank loans.
Depending on how much money you have saved up, you could also start benefitting from this scenario too. If everyone is out of work and short on cash, you have a considerable advantage when it comes to negotiating for big purchases like buying real estate and stocks.
What Can I Do Now to Prevent This?
I am sure some of you are reading this and saying, "Okay, I get it things are bad, but what is the solution?"
The solution. Save. Not for a rainy day, let’s shoot for a rainy year.
A litmus test I do with people is, "How long can you pay your bills for if your income got dropped to zero?" 75% of Americans don’t have enough money to pay for an emergency $1,000 expense, so I am guessing not many. How do we go about improving that you might ask then?
We have to personally start saving money at a scale that would make most people feel uncomfortable. When times are good, you have to be saving vast sums of money. Not just the money leftover, but money explicitly set aside.
I get it. Saving money is boring. It means you will have less money for fun activities. But if you are struggling to save money when you are employed and times are good, what is going to happen when you get laid off and when you look for work, and nobody is hiring?
That is the situation that many Americans are facing right now, and that is the same situation they were facing in 2008.
I want to believe people will learn their lesson. But unless we have a national discussion around personal financial responsibility and education, I think we will be back in the same situation in a not too distant future.
I hope nobody reads this as me accusing anyone of being a bad person for not saving. I am very sympathetic to people in bad economic situations. I was incredibly lucky to have been taught a lot about personal finance from my parents. I also got lucky that I find the topic very interesting as well.
It is my goal in the next ten years to become a thought leader and educator in the field of personal finance. If anyone reads this and has more questions or wants to learn more, make sure to comment, and I will gladly answer your question.
About the Author
I am new to this whole blogging game. I write about topics that I find interesting, and that can provide value to my readers. The recent topics I have written about are finance, business trends, and some self-help. If you have any comments or questions around any of these topics, feel free to email me at email@example.com. And if you like the articles subscribe to my newsletter to get all my month’s articles in one email.