Have Your Finances Improved Since The Financial Crisis?

Written by Richard Barrington

Financial Expert

Edited by Kristin Marino

Managing Editor

The global financial crisis has been over for nearly a decade. Are your finances any better off now than in the immediate aftermath of the Great Recession?

On the one hand, signs of prosperity are evident. The stock market has been hitting record highs and the unemployment rate has dipped below 4 percent according to the Bureau of Labor Statistics. These should be the good times — yet there are signs that many Americans are missing out on the prosperity.

Don’t repeat the mistakes of the financial crisis

You might think an economic boom is an opportune time for people to adopt good financial habits. For too many, however, it is often not the case.

Excessive borrowing was a major factor in precipitating the Great Recession and in making it so devastating. And yet, perhaps the most disturbing echo of the global financial crisis is that debt has soared again to new highs in recent years, despite a long economic expansion.

Federal Reserve statistics show that student loan, auto loan, credit card and mortgage debt outstanding have all reached record highs this year. The first three categories top $1 trillion each, while mortgage debt is approaching $15 trillion.

What all of this means is that too many American households are not prepared to weather the next economic downturn. Where do you stand? Use this simple checklist to assess whether you have developed good financial habits or whether you might be especially vulnerable in the next recession.

Checklist: Have you learned how to manage your money better?

1. Have you reduced your mortgage balance?
   Financial advisers often point to home equity as a component of net worth; but as the housing crisis proved a decade ago, home equity can disappear quickly when prices start to go backward. The real way to improve your financial security and reduce the burden debt places on your monthly budget is to steadily pay your mortgage balance down over time.
   Tips for improvement:
   • Resist pitches for home equity loans, unless it is for something that will improve the long-term value of the property
   • Try to make extra principal payments on your loan when possible
   • If your income has improved since you got your mortgage, consider refinancing to a short-term loan for faster repayment
2. Have you reduced your overall debt?
   With debt hitting record levels across several categories, some American families are headed for trouble. What are signs of too much debt? Well, if you are struggling to keep up with payments during an economic expansion, the next recession could be overwhelming.
   Tips for improvement:
   • Consolidate existing debt — but only if it will reduce your overall interest expense
   • Never borrow without planning on how debt repayments will affect your budget
3. Have you paid down your credit card balances?
   The best way to reduce debt is to attack high-interest debt first, and often this means paying down your credit card balances. This is especially timely now, because credit card rates have been rising.
   Tips for improvement:
   • Move balances to your lowest-interest credit cards — but check first for balance-transfer fees
   • Use a credit card calculator to see how much you should budget monthly to pay off your credit card
4. Have you taken advantage of any refinancing opportunities?
   If you are looking to refinance your mortgage or consolidate debt, now is the time. Interest rates are still relatively low, and loan approval is much easier to get when the economy is doing well than when it is struggling.
   Tips for improvement:
   • List all your debt from highest to lowest interest rate, and look for loans that would lower those rates
   • Remember that true savings from refinancing involves not just lowering your monthly payment, but reducing the long-term-interest expense on the loan
5. Have you rebuilt your emergency fund?
   An emergency fund can give you a buffer against financial setbacks, including things like losing your job. During a strong economy, you should look to build your fund up to represent around six months’ worth of expenses, in case you have to draw on that fund during a downturn.
   Tips for improvement:
   • An emergency fund should be in a risk-free vehicle like a savings account, money market account or a CD with a low early-withdrawal penalty
   • Be sure to shop around to get the best interest rate on your CD, savings or money market account, since this money may sit idle for long periods of time.
6. Have you gotten retirement saving on track?
   One of the first places people skimp when money is tight is on contributions to their 401(k)s, IRAs, or other retirement plans. However, with the recession now nine years in the rear view mirror and a strong job market, this is a good time to make larger contributions to catch up.
   Tips for improvement:
   • Take into account employer matches and tax characteristics to decide which retirement saving vehicle is most advantageous for you
   • Look for ways to contribute more than the normal annual limits by participating in a Health Savings Account or making catch-up contributions if you are aged 50 or above.

Have you learned how to manage your money better since the financial crisis? If you haven’t improved your finances since the economy started to improve, now is the time to do it. Once the next recession hits, the strongest survivors will be those that got ready before trouble started.

Frequently Asked Questions

Q: I’m 56 years old, taking care of two parents who are 79 and live with me. I’m also taking care of three grandchildren ages 5 through 11, who are not yet receiving any child support. Was working two jobs, but got laid off from one, which also caused me to lose my health insurance, which I now buy privately. Because of my situation, there was a loan against my retirement plan, which cashed out now totals $16,000. I want to be able to draw on the money in emergencies without penalty. I was thinking a savings account, but came across a 1.10 percent one-year CD. Any advice would be welcome. I know the money won’t earn much, but I want it at least to earn some interest.

A: You have certainly taken on a multi-generational bundle of challenges. To start with the simple part first, while 1.10 percent is a good interest rate by today’s standards, a one-year CD does not meet your need to be able to access the money without penalty in an emergency. Take a look instead at the best savings accounts and money market accounts and you should be able to find some offering nearly as much interest without the penalty if you need the money within one year.

Given all the people under your care, if you have not done so already, you should contact your county’s social services office to see what resources may be available to you. There is a somewhat confusing array of benefits available for the elderly, veterans and children from federal, state and local governments. Any person unfamiliar with that world would have a hard time finding out what is available, let alone navigating the application process, but social services specialists often have their fingers on the pulse of what is available and how to get it. You should not let the fact that you are working hard deter you from accepting a little extra help with all you have taken on.

On another matter, you mention that your retirement plan was diminished because you borrowed against it before cashing it out. You should check the IRS website at irs.gov to see whether you have inadvertently made an unqualified withdrawal by borrowing against it without paying it back.

Finally, this won’t help your situation, but it might help others who read this: When pressed for cash, keep in mind that 401(k) plans and other employee-benefit balances are typically protected from creditors. This is yet another reason to refrain from tapping into those resources prematurely, let alone cashing them out.

More resources for credit card holders:

Calculator — Should I switch to a lower-interest credit card?

Want to compare credit cards? Read up on different types of credit cards: Credit card essentials

What to do when banks raise rates

More resources for bank depositors:

Want a consistently competitive bank? Read America’s Best Rates survey of the top ten

Shopping for the best CD rates? Use our CD rate finder tool

Ready to work on your savings goals? Try the savings goal calculator

Emergency funds: Why opening multiple money market accounts is a smart move