An Ounce of Prevention is Worth a Pound of Cure

On September 14, President Obama delivered a speech marking the unofficial anniversary of Wall Street’s 2008 meltdown. Few of us will soon forget the news reports detailing the troubles that several of the world’s most lauded financial institutions encountered. In what seemed like an instant, Lehman Brothers, Merrill Lynch, AIG, and others were in dire straights, and as a result, so was our economy.

Although the president spoke optimistically and voiced his wish that the economy soon regain a sense of normalcy, he urged caution. In President Obama’s opinion, our nation faces a long road ahead as we recover from our recent recession.  He also warned that normalcy cannot be allowed to lead to complacency. That same note of caution has been sounded by a number of economists, who point to statistics indicating that the American public typically finds it difficult to imagine difficult times during periods of prosperity.  In light of the rollercoaster ride that America’s personal savings rate has been on over the last few decades, that argument appears compelling.

We all know that consumers save significantly less money during economic booms, and they spend less during hard times.  While that seems like logical behavior, at least on the surface, the point is that savings shouldn’t be predicated on a good or bad economy.  Your savings should be based on your desire to achieve your family’s financial goals, and to be adequately prepared for life’s uncertainties.

These uncertainties are most often caused by fairly unpredictable forces: by medical emergencies or unforeseen layoffs, by natural disasters or the death of a loved one. In the case of our most recent challenge, the “outside” forces that affected most Americans were hidden within the financial system itself.  As a result of the troubles there, our economy experienced a disastrous ripple effect that has affected each and every one of us, particularly with respect to higher interest rates and tighter lending policies.  As President Obama noted, it is particularly troubling that some people within the financial industry already appear to be ignoring the lessons of the past year. If that proves to be the case, our recovery will be incomplete, or, worse, we may slip back into recession.

What can we do to protect ourselves? The best answer is increase our financial knowledge.  It stands to reason that if you make informed decisions, you reduce your own personal risk. How many victims of the foreclosure crisis might not have accepted the terms of their adjustable-rate mortgages if they knew what they were getting into? Unfortunately, because the need to be financially literate has been such a low priority in our nation, millions of homebuyers didn’t know what lay in store for them, and we all found out the hard way, along with the Wall Street experts. Today, taking personal responsibility for your own financial education is only one part of the solution. The proposed Consumer Financial Protection Agency would also help consumers, ensuring among other things that the lending terms in contracts are transparent and easily understood. In the meantime, a little learning may prove to be a valuable thing.

For more information, or to speak with a certified credit counselor please contact Cambridge Credit Counseling at 800-897-2200 or www.cambridgecredit.org.

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