Preparing for a Recession? Avoid These 6 Money Mistakes
Written by
Nicole Spector
Edited by
Ashleigh Ray
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There’s been a lot of chatter in recent months that a recession could be about to hit the U.S. economy. Experts are divided on whether or not that will happen, but keep in mind, nobody — not even top global economists — can predict a recession with 100% accuracy.
“Believing that one can predict when a recession is going to occur and how that recession will affect one’s finances is fool’s gold,” said Robert R. Johnson, Ph.D., CFA, CAIA, professor of finance at Heider College of Business, Creighton University.
Not being able to predict a recession is even more reason you should always be prepared for one, as one can strike seemingly out of nowhere — just look at what happened during the onset of the COVID-19 pandemic. If you’re getting your finances ready to survive and thrive during a recession, avoid these six money mistakes.
Not Being Mentally Ready and Thinking Short-Term With Investments
One of the most significant challenges to having financial success in investing exists in your mind. We tend to take financial losses pretty personally and think more about what we’ve lost than what we can or could gain.
“The biggest hurdle to long term success in investing is mental,” Johnson said. “Research has shown that we suffer losses at a much higher rate than we savor gains. Baseball philosopher Yogi Berra once said, ‘Baseball is 90% mental. The other half is physical.'”
It’s worthwhile to also think of investing as being 90% mental.
“When stock markets decline, often during recessions, people have a knee jerk reaction to ‘sell out of stocks’ and take on a risk-off strategy,” Johnson said. “The problem with that philosophy is that one has to make a series of good decisions — when to get out in advance of the recession and when to get back in when the recession is over. And, they end up ‘selling low and buying high.'”
But when you “derisk” your portfolio, you’re also robbing yourself of opportunities that will inevitably open up when the stock market rebounds, as it always does.
“Prepare yourself mentally for the ups and downs of the stock market,” Johnson said.
Not Having an Emergency Fund
It’s always bad to not have an emergency fund, but it’s downright disastrous to not have one when bracing for an economic downturn that could disrupt your financial wellbeing.
“When it comes to preparing for the possibility of a recession, not having an emergency fund is a major pitfall,” said Erika Kullberg, personal finance expert, attorney and founder of Erika.com.
“In this case, having a cushion of three to six months’ living expenses can be a lifesaver. You can prioritize building an emergency fund by setting aside small amounts regularly. Make the most of automated deposits to your savings account.”
Taking On Unnecessary Debt
About to make a big credit card purchase? Hit the pause button and really consider whether you need this or can’t cover it with cash, as another dire money mistake is taking on unnecessary debt.
“If a recession does materialize, you don’t want to regret recently borrowing large amounts,” Kullberg said. “If your income level changes and/or expenses rise, extra debt can put you in a very vulnerable position. Focus on paying down any high-interest debt you already have, rather than adding more.”
Not Adjusting Your Budget
Budgets are not set in stone and should be updated regularly. If you’re preparing for a recession, it’s necessary to reassess and possibly revamp your budget to make it even leaner.
“A recession calls for cutting back on non-essential spending and revisiting your priorities,” Kullberg said. “Make sure your budget reflects that, and check in with it at least once a month to make sure things are still in good shape there.”
Believing That Cash Is King — And Hoarding It
You’re probably familiar with the saying, “Cash is king.” It’s a catchy phrase, but don’t adhere to it as truth and hoard cash that could be working harder for you in an investment.
“One of the biggest money myths is that cash is king,” Johnson said. “Over the long run, holding significant amounts of cash ensures that one will suffer significant opportunity losses. When it comes to building wealth, one can either sleep well or eat well. Investing conservatively allows one to sleep well, as there isn’t much volatility. But, it doesn’t allow you to eat well in the long run, because your account won’t grow much.”
Relying On Family, Friends and Social Media for Financial Advice
Your Aunt Kathy may have really smart recommendations about what to do to properly get ready for a recession, as may your favorite money influencer. But don’t put all your faith in what others say — no matter how successful they’ve been. Every financial situation is unique, including yours.
“My most significant advice is to avoid receiving advice and tips from social media, friends or family members,” said Dr. Erika Rasure, Ph.D., chief financial wellness advisor at Beyond Finance. “They may mean well, but your financial plan should be unique. Only you know your situation.”
If you do decide you need outside advice, consider enlisting the help of a financial professional who can be your guide through market ups and downs and bolster your confidence — possibly along with your investment portfolio.
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