When the last recession started in December 2007, I was in a very different place in my life. Although I was married at the time, I was only 27 and had no children. It meant I had a lot more freedom and a lot less responsibility. But I certainly wasn’t as financially savvy as I am today.
Although I didn’t make as much financial progress as I would have liked in my late twenties, the two years that made up the last recession weren’t a total loss either. I certainly learned a ton, including lessons that still benefit me today.
Challenge #1: Getting into debt
Like many people in our late twenties, my husband Greg and I spent more money than we should have on things we didn’t really need. We swapped our cars for newer cars every few years and went to dinner all the time. We’ve also overspent on home improvement projects that haven’t necessarily paid off. And we haven’t saved enough of our income.
At one point, we owed over $50,000, between credit card debt and car loans. Even with good jobs and stable incomes, we managed to dig a hole that took years to get out of.
How we overcame it
By the time 2008 rolled around, I was pregnant with our first child and we were ready to change our finances. Something about having a girl on the way made us take our lives more seriously, and we knew we had to change to have the life we really wanted.
Although it took some time to figure out how to turn things around, we eventually started using a method known as zero-sum budgeting and reduced our regular expenses significantly. For example, we stopped eating out and halved our food and discretionary spending overnight.
From there, we spend all of our “extra” money on paying off our debts. Progress was slow at first, but eventually we paid off all our credit cards and car loans. After paying off $50,000 in debt, we pledged to be debt free – and have been since then.
Challenge #2: Buy real estate at the top of the market
Although we racked up credit card debt and car loan debt in our late 20s, we did a few things well. For example, we invested $10,000 to purchase our first rental property in late 2007 and upgraded our first home to a second rental in early 2008.
Unfortunately, the housing crisis that began in 2008 caused the value of both of our rentals to drop instantly. It was really stressful for us at the time, especially since we bought these properties with the aim of building long-term wealth.
Although there are no clear signs that record house prices will fall if the United States enters a recession, buying expensive can hurt, especially if you face a layoff or a tighter budget due of inflation.
How we overcame it
Fortunately, the rental prices we could charge for our properties did not go down, only the value of the real estate. With that in mind, we simply put the houses up for rent and proceeded as owners.
We still own these properties, although we plan to sell both this year. Even though we experienced a decline in equity when house prices fell, both houses are worth more than double what we paid for them. We have also never experienced a vacancy longer than a month during our entire tenure.
Challenge #3: Not investing enough for retirement
Although we bought investment real estate earlier in our lives than most people, we dropped the ball when it came to retirement in our mid to late twenties. We both had a 401(k) plan through our jobs, but we contributed a small portion of our salary, compared to what we save and invest today.
How we overcame it
While I wish I understood the power of compound interest in our 20s, we more than made up for our lack of retirement savings in our 30s and early 40s. Saving and investing became much easier to manage once we were debt free, and we learned a lot about investing along the way.
We are now self-employed and maximize our individual 401(k) contributions each year, while investing all other funds in a traditional brokerage account. We are 42 and 43 now, and most people would say we are financially independent. However, since we have children at home, we are postponing full retirement for another seven years until our youngest reaches college age.
The bottom line
A lesson I’ve learned since the last recession is that life can change far more than you would predict over a period of a decade or more. I also learned that it’s okay to make mistakes and you can find your way back if you figure out what you need to do, make a plan, and stick to it.
In 2007 and 2008, we were both working for someone else and we weren’t really moving forward. Today, we are debt-free, self-employed and live our lives entirely on our own terms.
Times of financial turmoil can make you question everything, and it’s easy to feel like you’ll never make progress. But if you know where you want to be and what it will take to get there, you can start building the life you want.