Yesterday, my friend Olivia from Birds of a FIRE posted an interesting question about life in the Great Recession.
As you can see, she gathered a ton of responses. I of course responded with a brief summary of my experience, but thought I would go into greater detail today. I think the recent gyrations of the market are making folks think of that time, a decade ago, when the markets went to hell.
You see, the Great Recession had a huge impact on me, my family, my investment philosophy, and my risk tolerance.
Setting The Scene
The year: 2008.
My age: 28 years old
Family situation: Two young kids, ages five and one. My husband was employed full time, working second shift while I worked a corporate IT job at a large company during the day.
Housing: We had sold our condo and purchased a home in January of 2006, so had owned our home . It had been difficult to find a house at a reasonable price. In fact, we had looked at nearly fifty homes before buying the one we ended up with. Most homes were overpriced, being sold mid-flip, or just in bad shape and obscenely expensive. We had made a great return on the condo we sold, netting enough for a down payment on our house.
Money facts: I was enrolled at the time in my companies Employee Stock Purchase Plan (ESPP), and shares had gone up from about $70 each to slightly over $100 each during the time I was purchasing them. I received a 15% discount off the price at the beginning/end of each period, which seemed like a good deal. I hung onto that stock, although I didn’t buy company stock in my retirement plan.
The company used to give their matching retirement contributions in company stock, but fortunately had stopped that after the dot-bomb of the early 2000’s.
Our families income had increased quite a bit since the early days when my oldest son was born, back when we earned under $50k combined for several years. But our lifestyle had gone up too.
I had been tracking my net worth since my early 20’s, in an Excel spreadsheet. I was already a personal finance nerd, reading books, blogs (the few that were available), magazines and forums on investing and personal finance. My investments were mostly through my employers 401k, although I had some money with Vanguard for college and after-tax investing. My husband had the same.
We had seen pretty good returns since 2000, although it was nothing like the amazing returns of the late 90’s. Still, our net worth increased slowly but surely. In fact, my current net worth spreadsheet (lost my old one) goes back to January of 2007, so I can see exactly what happened during the Great Recession.
We had a 30 year mortgage at something like 6.5%, which was not too bad for the time. It was certainly better than the rate I had gotten on my condo back when I bought it in 2000 – 8.375%.
Overall, life was good but busy. With two young kids, and two people working full time, my husband and I almost never saw each other. In fact, on Friday nights my oldest son and I would wait up until after midnight to welcome my husband home for the weekend. I worked from 6 AM until 3 PM, and my husband from 4 PM until about midnight. We saw each other on weekends, but were on opposite sleep schedules. He watched and cared for the boys during the day while I was at work, and I did the same at night. We couldn’t really afford a daycare bill on top of the other bills, so a split shift made the most sense.
We didn’t see the signs of the coming crisis. No one did. We were just a young family, busy living our lives.
There are a number of moments that stand out starkly in my memory.
I remember coming home from work, the day the DOW dropped by 777 points. Now, I know, the DOW just dropped by more than that the other day. But for context, that drop was when the DOW was at about 11,000 points. Eventually, through March of the following year, it would drop by 54% from the high of October 2007. There seemed to be no end in sight to the drops, and of course, in March 2009 we didn’t know if the market was going to start heading up or if it was going down more.
Companies were closing right and left. There were announcements seemingly every single day about layoffs, the market going down, housing crashing, and bailouts.
My company, the one that was doing so well, with stock over $100 a share, was in trouble. BIG trouble. I worked for an insurance company at the time, and the company had two main businesses. Property casualty insurance (personal and commercial), and life insurance.
For a number of years, the life insurance arm had been growing and growing by leaps and bounds. The property casualty arm, where I worked, was more of a steady earner. It wasn’t glamorous, but it brought in money.
Turns out the life insurance arm had a business model that totally didn’t work in a market like the great recession. It related to annuities the company issued, which essentially had high guaranteed payouts and were backed by investments. Investments that suffered greatly.
The stock went from its high of over $100 a share down to three bucks and change.
A decline of 96.5%.
Note – I’ve been asked before if the stock ever fully recovered. No it did not. Today the share price is still under $50. Great for people who bought at three bucks. Bad for people who bought in on the ride up to $100.
The company was saved by a TARP bailout. (Note, the company doesn’t appear on the list on the Wiki page, for some reason) Many of my coworkers had lost a ton of their retirement funds. And that ESPP certainly wasn’t a bargain anymore. Luckily I contributed a very low percentage of my income.
Me, the person who updated her net worth spreadsheet every few months, eventually stopped. From January 2009 through January 2010, there are no entries.
My 401k went down at least 40%. I would put in contributions and they’d be gone the next day, the market declines having swallowed them whole. The same was true of contributions to my kids college funds. The value of our house was crashing.
Fortunately, although I was an investor, I also had a good amount in cash (for emergencies). This helped buffer losses in my overall investments. Still, seeing years and years of savings go up in smoke, with no end in sight, was scary.
And it was only the beginning.
Of course, life wasn’t just about money. Both my husband and I still had our jobs in 2008, and we were busy with the kids. We didn’t personally feel the impact, other than the scary news and on paper in my net worth Excel, until 2009.
It was 2009 that my companies stock went to three bucks.
In 2009 my husband was in a car accident, and we decided it would be a good idea to get a loan for a new car. Interestingly, I still own that car today.
I also started my MBA program. I was sitting in a statistics class when I received a text message from my husband that his factory was closing down. He was about to be unemployed for a long time. In fact, he’s never worked full time since this point.
So I was 28 years old, with a house that was only going down in value, living on one income and unemployment, with a mortgage & car loan, and two young kids.
It was a scary time. I didn’t know what was going to happen to the markets. I didn’t know what was going to happen to my job – would there be layoffs? Spoiler alert – yes there were, but luckily those of us not in the life arm were safer. Eventually, in 2011, I would leave that company for my current one.
And by the way, I didn’t make a six figure income during this time. In fact, I only hit that mark on salary in 2013, when I was 33 years old. Part of why I was getting this MBA was to increase my income in the long run.
Frankly, I was scared. I was tempted to sell out my stocks, something I thought I would never ever do. I talked big about being “greedy when others were fearful”, but when everything was going to hell with no end in sight, I was scared.
My husband saved me from selling it all. He reminded me of everything I had told him in my early 20’s about Buffet and the long-term returns of the market. So we held on, kept investing, and just kept our heads in the sand about our account values.
Long Term Impacts
My husband was unemployed and unable to find work right up until he almost died of septic shock in 2012. Connecticut just didn’t have jobs for someone who worked in a factory, especially at that time.
Our cash flow suffered greatly for years. We had a budget based on two people working full time, and living off my income plus unemployment for years (then just my income for more years) took a big toll. We managed to keep our heads above water, but in reality we were treading water big time.
I continued to invest for retirement and the kids college, but that was it. There was no 30, 40, or 50% savings rate. Remember, there was no six figure income on my side. We saved maybe 12%? of our income during this time, and only 6% when my husbands medical crisis struck.
And actually, we really saved less, because we were taking money out of savings to pay bills, emergencies, etc.
We also developed a bad habit of putting money on a credit card throughout the year, and paying it down to zero with my annual bonus. This was a bad idea, because what if there was no bonus? We told ourselves this was for the rewards, but frankly, it was really a way to bridge the cash flow gap.
Learning to live on less after you have been living at a certain level of income is hard. It sounds easy, but really, you’ve developed certain habits that are hard to break. And you have fixed expenses you committed to at a higher income level, which can be difficult to get rid of when your income drops.
We refinanced the mortgage down to 5.375% at some point during this, dropping the monthly payment a bit. But since I changed jobs in 2011, I had to get a student loan to help bridge the gap between the old reimbursements and my new companies.
The value of our house went down and had never recovered to the price we bought it for, almost thirteen years ago now.
What I Learned
I learned a lot about investing, the importance of diversification, myself, and how to survive on a lower level of spending during this time.
You aren’t going to know when the next recession or crash is around the corner. It’s going to happen while you’re living your life, likely oblivious to the larger economic forces at work.
I don’t rely on an increase in value of my primary residence for anything. In fact, living through this time has made me skeptical of the general real estate market.
Debt is a heavy chain around your neck in bad times. This was brought home again during my husbands illness, when he couldn’t work and didn’t bring in unemployment. This is the root cause of my strong desire to be 100% debt free, even though mathematically it doesn’t make sense.
Individual stock risk is a real thing, and needs to be considered carefully. Yes, you lose out on the upside. But there’s a very real potential downside.
Holding on during bad market times can be worth it in the end, but can be difficult when your cash flow suffers. I keep more in cash than I should, and shudder at the idea of being 100% invested in stocks. Diversification is a real thing you should do. Emergency funds and cash will save you.
Layoffs and job losses happen to good people, due to forces outside of their control. You’re most likely to be laid off when the job market is bad. There were a lot of good people at my old company, who worked very hard, who just happened to work in the wrong division at the wrong time. And my husband and his co-workers were just all gone when his factory closed. It didn’t matter in the end who was a good worker and who slacked off.
You need to “make hay while the sun shines” when it comes to your income. If you earn a high income, that’s great! But you don’t know when that might end. So take advantage of the good times to squirrel as much as possible away.
Our budget and level of spending is essentially flat since 2008, even though my income has more than doubled. I now make more by myself than my husband and I used to make combined. We have less debt than we did back then. But we never again trusted that jobs, income, and market returns were going to be the silver bullet. And after living from paycheck to paycheck (after retirement and college savings, which isn’t really paycheck to paycheck, but it felt like it) for years, we never wanted to be there again. Essentially all my increase in income for the past ten years has gone into debt payoff, savings, and investing.
This entire experience is why I don’t have an FI number or FI date. It’s also why I don’t set financial goals that depend on market returns. I set goals based on factors I control, so my goals are around how much I can save.
We learned to live on a low level of income, and essentially never increased it. In many ways, the way we live now is the same as it was back then. And in some ways, we live on less.
I’m pretty sure this experience is going to shape my risk tolerance for the rest of my adult life, in a similar way to those that lived through the Great Depression.
Now It’s Your Turn
For my younger readers: what questions do you have on the Great Recession?
For readers that went through this time: what was your experience?
Comment below. And be sure to subscribe to my blog for more posts every week.