Six lessons to learn from the Noughties

As we get ready to enter a new decade, here are six important financial lessons from the 21st Century so far...

I find it amazing that we're already a decade into the 21st Century. I can clearly recall the mixture of euphoria and millennial panic that greeted the year 2000 (remember the flop that was 'Y2K'?).

We're ten years into a new century -- so what? Actually, in financial terms, I think that the Noughties have been one of the most absorbing (and, at times, alarming) decades in modern history. Here are six lessons which the past ten years have taught us (in A-Z order):

1.    Banks can go bust

British bank Overend, Gurney & Co. failed in May 1866, a victim of Victorian speculation into railway shares. After this, no big British bank went bust for 141 years. Then, in September 2007, there was a run on Northern Rock, with savers queuing to withdraw their money in high streets across the UK, and of course the bank eventually had to be nationalised. So banks can go bust, after all!

Safety is still a major issue for savers. The easy way to ensure your money is safe is to invest no more than £50,000 in each financial institution, as you'll then be protected by the Financial Services Compensation Scheme. To find out which savings accounts currently come top of the table, visit our savings centre.

2.    Busts follow booms

In his Budget speech in March 2006, Chancellor Gordon Brown said, "No return to boom and bust." This bold claim was based on the fact that the UK economy had grown every year since 1992 (although Labour came to power only in 1997). Alas, Brown showed unfortunate timing and this remark has come back to haunt him.

After 17 years in a row of credit-fuelled economic growth, the UK suffered a credit crunch in 2007, followed by a full-blown recession in 2008. This downturn has now lasted for 18 months, making it the longest and steepest decline (a drop of 5.8%) in modern British history. Nul points to Gordon!

3.    Government debt has soared

One thing governments find incredibly hard to do is balance their budgets. In other words, they often spend more on public services than they collect in taxes. This annual overspend is known as a budget deficit. Over time, these deficits build up into one almighty overdraft, commonly referred to as our 'national debt'.

In the 2009/10 financial year, the government will spend at least £175 billion more than it collects. This means that our national debt is increasing by £1 billion every two days. At the end of October 2009, the public sector net debt had risen to £830 billion. This equates to almost three fifths (59.2%) of our gross domestic product -- one of the highest ratios seen in peacetime.

In other words, our government is in deep hock and is forced to borrow by issuing Gilts (government bonds) like there's no tomorrow!

To get rid of your own debts, adopt our goal: Destroy your debts.

4.    House prices don't rise forever

After falling in the first half of the Nineties, UK house prices took off. Indeed, they rose every year from 1995 to 2007, as my table shows:

Source: Halifax HPI

As you can see, the average price of a UK home rose dramatically, from roughly £61,500 in 1995 to £197,400 at the end of 2007 -- a 220% increase in 12 years. However, this boom came to a dramatic end in 2008, with house prices falling by almost a sixth (16.4%). This produced a typical loss of £32,200 in a single year -- and a powerful reminder that house prices don't always go up!

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5.    Interest rates can suddenly plunge (and rise)

From the beginning of the Noughties to September 2008, the Bank of England's base rate moved up and down in a fairly narrow range. For most of this decade, the base rate was never higher than 6% and never lower than 3.5%.

However, as the credit crunch hit and the economy went into reverse, the Bank slashed its base rate. In six months, it collapsed from 5% to 0.5% -- a drop of nine-tenths (90%). Today, the base rate is at its lowest level since the Bank's creation in 1694. Therefore, the only way is up...

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6.    Mortgage debt mushroomed

One obvious consequence of a house-price boom is a dramatic increase in mortgage lending. As you can see from my next table, UK mortgage debt mushroomed during the Noughties:

Source: Bank of England

From the start of this decade to the end of October 2009, mortgage debt rose from £494 billion to £1,230 billion, an increase of £736 billion. In fact, it climbed by 149%, rising by an average of 9.7% a year. Then again, house prices rose much faster, so most homeowners are sitting pretty on a pile of housing wealth.

Of course, there are is much more we can learn from the mistakes of the noughties - so look out for a six more lessons, later this week!

More: Start saving for the next decade | The best credit cards for Christmas | Have a holiday from your mortgage payments