7 Biggest Mistakes To Make During a Recession

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There’s no denying that economic conditions in the U.S. are getting tighter in 2023. Between the Fed’s aggressive rate-hike policy to fight inflation and the sudden and noteworthy collapse of a handful of large banks, even the Fed itself has predicted at least a “mild” recession by the end of 2023.

See: Why Stealth Wealth Is the Best Way To Handle Your Money
Learn: How To Build Your Savings From Scratch

Whether or not there will be a recession of any size in 2023 or early 2024, it seems like a prudent time to make sure your financial house is in order. If a recession actually arrives, you’ll also want to avoid making certain financial mistakes, some of the most common of which are listed below.

Selling Your Investments

Recessions are often preceded or accompanied by market corrections or bear markets, in which the stock market falls by 10%-20% or even more. Emotionally, it can be hard to watch portfolio values fall by this much, and that scares some investors out of the market at the worst possible time.

Historically speaking, though, the stock market has always gone on to make highs after suffering through bear markets, rewarding the patience of long-term investors. For anyone but expert, professional traders — which are few and far between — selling at market lows is a sure-fire way to miss out on the best days the market has to offer.

Making Minimum Payments on Credit Cards

A recession is a time when you should be actively paying down debt, not reducing your payments to the minimums. Not only are recessions typically accompanied by high interest rates — making your credit card balances increase faster — but the potential for job loss is also higher.

While it may be hard for you to make sizable payments to your credit cards during a recession, if you lose your primary source of income, you might be in the position where you have to default on your debt, which would be a worst-case scenario. It’s usually a good strategy to attack your debt as much as possible while you’re still drawing an income, just in case.

Drawing Down Your Emergency Fund

Your emergency fund should be reserved for true financial calamities only. Using your emergency fund to supplement your income or cover your day-to-day needs should be resisted at all costs.

Otherwise, if you do encounter a true financial emergency during a recession — such as a car repair or an uncovered medical expense — you’ll have to go into debt to cover it, which is the last thing you want to do. 

Going Off Budget

A good budget is a flexible one that allows you to plan for contingencies both good and bad. This means that if times are tight, you should be able to use your budget to drop discretionary or unnecessary spending to keep your books balanced. That’s what a budget is there for in the first place.

The last thing you want to do is completely abandon your budget, because then you won’t be able to track where your money is going and you won’t have any idea how to keep your costs contained.

Stopping Your Savings Plan

If you’re trimming costs to get by during a recession, stopping your savings plan should be the last item to go. A well-designed savings plan requires contributions through thick or thin, and if you stop them, you won’t reach your goals.

In fact, if at all possible, a recession can be a great time to actually increase your savings and investment contributions, as you can both take advantage of higher savings rates and also pick up shares of stock when market prices are lower.

Borrowing Money

A recession is probably the worst possible time to borrow money. Not only will you be increasing your debt load at a time when interest rates are likely higher, you’ll also be digging a financial hole when the potential for job loss has increased. The combination of increased debt and potentially losing your income is the death knell for a financial plan.

Not Having a Backup Plan

Even if you follow all of the important steps to prepare for a recession — such as keeping on budget, maintaining your savings and investment plan and avoiding going into debt — you’ll want to have a backup plan just in case.

If you lose your job, for example, you’ll want to make sure that you’re prepared to deal with that unfortunate situation in the best possible way. A Plan B might include steps like boosting up your emergency fund to even higher levels while you still can, or keeping your investments liquid so that in a worst-case scenario, you can cash them out with the fewest financial ramifications possible.

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