Patrick Semansky, Associated Press
Anna Newell Jones knew she was living well beyond her means when the Great Recession struck: She was $24,000 in debt. What surprised her, though, was how quickly she climbed out of that hole during the agonizingly slow recovery.
She had a lot of work to do to cut costs, start saving and stop being what she called “a slave to the economy.”
Before the Great Recession, most of her $28,000 annual salary as a court clerk went to paying the mortgage on a one-bedroom duplex in Denver. She had turned to credit cards to pay for fancy dinners, vacations, furniture and more.
“I had always thought that a recession was something that happened a long time ago and it wouldn’t happen in my lifetime,” Jones, 34, said. “So it really was a big wake-up call as far as ‘Can I afford the life that I’m living?’”
She learned she couldn’t.
The Great Recession ended five years ago this month, but the severe pain and fear it caused continue to haunt Americans and have led to major changes in how Jones and many others spend and save.
Baby boomers who had hoped to retire remain on the job to rebuild battered 401(k) plans. College graduates live with their parents as they work at low-paying jobs and look for better ones. U.S. companies outside the banking sector sat on a record $1.6 trillion in cash at the end of last year, afraid to expand for fear the economy will tank again.
More than anything, the recession triggered a simple but profound change — people are spending less and saving more. That’s a key reason the recovery has been so sluggish, economists said; consumers account for about two-thirds of all economic activity.
Their adjusted behavior, though, has had a positive effect as well. Many Americans have repaired their finances by ending bad habits developed in the years leading up to the recession.
Soaring housing prices in the mid-2000s combined with easy-to-get loans spurred U.S. households to borrow at record levels. By 2008, they had piled up an all-time high of $12.7 trillion in mortgage, credit card and other debt.
At the same time, the percentage of disposable income that people saved plunged to a historic low as rock-bottom interest rates discouraged them from keeping money in the bank.
With such lopsided finances, the housing market collapse and subsequent economic crash sent many people into a frightening world of underwater mortgages, foreclosures, unpaid credit card bills and debt collectors.
Even people who avoided those problems faced financial trauma as the value of their homes, retirement plans and investments plummeted.
“The crash was more or less inevitable,” said William Emmons, a senior economic advisor at the Federal Reserve Bank of St. Louis. “The rate at which people were borrowing and spending was just really headed for trouble.”
Altered habits from the searing experience had a major effect. Households have reduced their overall debt by more than $1 trillion from the record high. And the personal savings rate of 4 percent now is double the all-time low hit in 2005, though a survey released Monday found that many people still don’t have enough money put away to deal with a lost job or other emergency.
In a recent Gallup poll, Americans said they preferred saving to spending 62 percent to 34 percent, the widest margin since the company began asking the question in 2001.
“One of the things I’ve been concentrating on is putting money aside so I’ll be prepared,” said Eric Rossman, 38, of Wappingers Falls, N.Y., who works in computer security.