The following is a guest post from Jonathan of Master Your Card.
The Great Depression of 1929 is widely considered to be the worst period in US financial history, and the collapse of the Wall Street stock exchange left millions of ordinary people feeling that they couldn’t trust the banks. To a lesser extent, many of us are experiencing the same type of suspicion and mistrust as far as the banking system goes, not least because some financial experts have predicted that the current recession could be the worst since the Depression. With this in mind, what can we learn from looking back at the Great Depression?
# 1 – Consider cash instead of credit
We live in a credit-rich society in which many of us think nothing of whipping out the credit card to pay for purchases. Back in the days of the Great Depression, cash was generally the most common means of paying for things. The lack of trust in the banks led many people to hide their cash under the mattress for fear of losing it altogether and credit became a luxury that the majority of people couldn’t afford to use.
While we don’t need to go to these extremes thanks to FDIC protection, turning your back on credit isn’t a bad idea. If you’re struggling to keep your head above water, stick to cash only and forgo the credit cards altogether. This will much reduce your spending as it forces you to think about whether you really need to buy the item(s) in question. If you don’t have the cash available, don’t go through with the purchase. This may mean postponing purchases until the price falls to one that you can actually afford and going out of your way to hunt for bargains (see tip # 2 for more on the latter).
# 2 – Live as frugally as possible
In the Great Depression, frugal living was the norm and people tended to live as cheaply as possible. This was often out of necessity, but it was arguably what enabled them to survive the financial hardship. This is a tip that is useful in any type of economy, but especially so during a recession or depression.
Living frugally doesn’t necessarily mean living like a cheapskate. Frugal shoppers look for the best bargains so that they’re getting the best value for money, just as previous generations did during the Great Depression. Their motto was: if you don’t need it, don’t buy it. The Internet makes it easier to search out bargains as comparison websites can show you the best prices in seconds.
Another aspect of living frugally involves using up what it is already in your house before you buy replacements. This includes fixing broken items whenever possible rather than shelling out to replace them straight away, re-using items if they no longer serve their original purpose but can have other uses, and growing your own fruit and vegetables. If you’re currently struggling to keep your outgoings below your income, living frugally is a necessity to keep your budget down.
# 3 – Work on your emergency funds
If you suddenly lose your job or are hit with unexpected outgoings, you need an emergency fund to fall back on to cover you. If you don’t have one, the chances are high that you’ll fall into debt. It’s recommended that you put at least 10 per cent of your income into savings to act as a cushion if you need to access money quickly. Even in the Great Depression, saving for the future was a regular occurrence as people looked to get themselves out of their often dire situations. The ones who did survive the Great Depression from a financial standpoint tended to be the ones who saved for the rainy days that they knew would come.
# 4 – Get yourself debt-free
In the Depression era, debt was seen as a big no-no and people did all that they could to avoid it. Admittedly, it was easier to do back then as credit wasn’t so popular or as widely available but it’s still a valuable tip. These days, staying out of debt is easier said than done when living costs continue to rise and unemployment is rife.
As many of us are already in debt of one kind or another, looking to consolidate debts together in a debt consolidation loan may be a good option to help you to manage your repayments by lumping them together in one repayment. This is useful if you have multiple debts and are struggling to keep on top of them all.
# 5 – Fix bad credit
While credit wasn’t as widely used during the Great Depression, it still existed as a means of paying for items at a later date and was frequently used to buy luxury goods such as cars. When the markets collapsed and the already fragile US economy began to follow suit, many people found that they simply couldn’t afford to meet the repayments for their credit purchases. If credit scores had existed back then, a lot of people would have been experiencing bad credit.
A poor credit score is bad news at the best of times, but this is even more so in a recession. During times of financial trouble, lenders will make it more difficult to obtain credit and this will hit you hard if you have a low credit score. With the advances in credit since the Great Depression, we have the opportunity to fix bad credit, but how do you go about trying to fix bad credit during a recession if you’re likely to be turned down for credit due to your credit score?
- Use credit sensibly. Don’t charge more to your credit card(s) than you can afford to pay off each month. You may want to use your card(s) for everyday purchases unless you’ve chosen to follow the advice in tip # 1 and prefer to pay in cash to reduce credit use.
- Pay bills on time. Late payments will impact on your credit score. On the other hand, making payments on time will show lenders that you’re a responsible credit user.
- Secured credit cards. If you have bad credit, lenders are unlikely to approve you for unsecured credit but this doesn’t mean that you can’t get credit at all. Secured credit cards require you to open a bank account, and the deposits made into this determine your credit limit. The lower credit limit gives you less opportunity to rack up big debts, but you still need to keep to 30 per cent or less of your available credit limit to avoid lowering your credit score.
The financial habits of previous generations who lived through the hardships of the Great Depression can prove valuable during the current economic crisis. Although times have changed somewhat as far as our spending patterns go, we can still adopt several of the basic ideas that saw them avoid financial ruin.