People make decisions they later regret when faced with the fear of an economic crisis. Unfortunately, making mistakes with your spending or investments can have lasting effects. Think through financial decisions and learn about common mistakes to avoid during an economic crisis or recession. Read on to be better prepared to manage your personal finances and avoid costly mistakes.
Not Living Below Your Means
In uncertain times, it can be tempting to start spending frivolously and rack up credit card debt. In some situations, like with the current Coronavirus crisis, you’ll have to spend money to prepare your household for potential grocery store closings and loss of income. Stay focused on needs instead of wants - avoid shopping for unnecessary items as a way to blow off steam. Do your best to avoid racking up debt and always make it a priority to pay your minimum payments on credit accounts.
Not Having A Budget
A monthly budget is an effective tool to use under normal financial conditions, but it is especially important during chaotic times. Identify areas where you can cut costs as well as how much you should be saving each month. This is helpful when your job may not be stable and you need to learn how to spend your money wisely. Learn how to create a monthly budget to set yourself up for success even in a precarious economy.
Withdrawing From Retirement Savings
When the economy starts to decline, people make decisions they would not even consider under normal circumstances. One of these mistakes is withdrawing from retirement investment accounts before retirement age and losing a significant amount of those savings due to penalties. You will be penalized for withdrawing from a 401(K) or IRA before age 59.5, so simply make the decision to not touch your retirement savings early. If you find yourself in a situation where you can’t make ends meet, make a log of all of your expenses for the past calendar month and identify where you can cut costs. Read 9 Ways You're Losing Money Without Even Realizing It.
Using Your Emergency Savings To Invest
If you have an emergency savings, it’s exactly what it sounds like - a savings only to be used for emergencies. This does not mean you should tap into it when the market is down to make a profit when it comes back up. You probably don’t know how long an economic crisis could last, so don’t bet your emergency savings on it. It may come to a point where you need that money for food or shelter and you don’t have it. Instead of using your emergency savings for investing purposes, focus on building your emergency savings and cut costs elsewhere so you can allocate that money to investments.
Not Having A Side Hustle
Companies may lay off or furlough employees depending on the severity of the economic situation and the industry conditions. Businesses may see a substantial drop in sales that affects performance based pay. The big picture is that your job and income may not be secure and having an additional revenue stream through a side hustle is an effective way to protect your livelihood. If you have a side job or business, don’t slow down because the situation is overwhelming, instead take advantage of it and use it to fuel your efforts. Use any extra time that you have for your side hustle and ensure that you can still provide without going into debt if your main source of income is threatened.
Taking Out Unnecessary Loans
As interest rates come down, it may be tempting to take out a personal loan just to have that extra money. If you don’t need it, then don’t open a new line of credit. Just because you may see offers with low interest rates now, the situation can change and you may not be able to make your monthly payments. Avoid taking on extra debt before you thoroughly examine the possible consequences. Focus on the monthly payments you need to make currently to ensure your credit doesn’t take a hit during the economic crisis.
Selling All of Your Stocks
If you have invested in the stock market and you are seeing stocks drop, avoid selling all of your stocks because you think it will only get worse. Have patience and ride it out. It may take time for the stock market to recover, but more often than not it does recover. This is especially true when what's affecting stock prices are influenced by factors unrelated to the actual stocks themselves. The market will bounce back after months or potentially a couple of years and when it does, you’ll want to have those stocks in your portfolio instead of selling them for cheap now.
The economy is always changing and there are countless forces altering it everyday. Whether it is a pandemic or a natural disaster, take the steps to prepare your finances and avoid making decisions that you will regret later. No matter how much money you make, managing your finances is the most important step when trying to achieve financial freedom. Don't lose sight of the goal because of economic turmoil. Most people will, which actually puts you, a clear minded, focused person, at an advantage. Use it and come out the other side ahead of everyone else.
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