- There are a few common mistakes people make before recessions that can hurt their finances.
- One is failing to pay down debt and damaging your credit score. Another is a lack of emergency funds.
- Pulling out of the market or pausing your retirement contributions are also mistakes.
Whenever anyone mentions to me the potential of an upcoming
, I go into panic mode. I’ve spent so many years trying to stick to a financial strategy that keeps me out of debt and helps me plan for future goals that the thought of a recession makes me feel like all those plans could fall apart, especially if I don’t plan properly for a downturn in the economy.
Rather than making fast decisions out of fear and anxiety, I’ve been trying to do research to get a clear understanding of both what I should do now and what I shouldn’t do to help recession-proof my finances. To help with that, here are the four mistakes financial experts say you should avoid when gearing up for a potential recession.
1. Selling out of the market
I’ve only had cash in the stock market for around three years and am still figuring out the best strategy to follow as a rookie investor. With talk of a potential recession on the horizon, I’ve started to think it might be best to pull all my money out of the market to keep it as cash.
Financial planner Brendan Sheehan says that’s not always the right move.
“The major issue with this is the investor has to be correct twice for this strategy to work. They first have to sell while the market is relatively high to the market bottom. But they also have to identify a point at which they will re-enter the market to participate in the market recovery,” says Sheehan.
One example Sheehan shares is how the market dropped -57% between October 2007 and March 2009. If an investor had sold at the start of that time, they would feel pretty good about it as the market continued to drop.
But the investor would also have had to buy back into the market before it recovered from the point at which they initially sold. But knowing when to re-invest is complicated, tricky, and not so obvious. Instead, it’s best to evaluate your portfolio and make decisions based on the risk you’re willing to take.
2. Spending money on things other than debt
For the past few years, I’ve prioritized avoiding debt as much as possible. Financial planner Marlene Erickson says that’s especially important when a recession might be looming.
Erickson says that not paying down debt before a recession is a mistake many will make. The problem is they might not realize how much of an impact this has on their
, which can come in handy during a recession if you need to open up new lines of credit, get new insurance, or refinance your mortgage to help you afford your life.
“Pay your bills on time and avoid the temptation to open any new lines of credit, particularly in the form of credit cards,” says Erickson. “Your credit score determines future interest rates you’ll be offered and insurance premiums.”
3. Pausing retirement contributions
While it might be tempting to stop contributing to your retirement fund to conserve your cash when a recession is looming, financial planner Mark Deering says that’s a mistake.
Deering says that saving for retirement can already be hard enough and has a lot of friction. If you’ve already been strategic about making regular contributions, he recommends not giving up on that momentum.
“Recessions can take years to develop, and you can’t stop contributions to your retirement to wait for them,” says Deering.
4. Not building an emergency fund
I realized the true importance of having an emergency fund in my 20s after I got laid off from my full-time job and didn’t have any cash set aside to help me get through months without any income. Financial planner Jennifer Garcia says that a recession is another time to make sure that you have three to six months of expenses ready in cash in case of a financial emergency.
To make sure that fund of cash is still earning interest, Garcia recommends keeping your emergency reserve in a high-yield savings account.