With the world’s economy in upheaval, it’s easy to panic when it comes to making financial decisions. Check out these eight mistakes people often make.
Financial Mistakes People Make in Panic Mode
Not Preparing an Emergency Fund
Advisors usually recommend an emergency fund of three to six months of monthly income, set aside in an accessible savings account. The money should not be touched except for emergencies such as unemployment, unforeseen medical expenses, home appliance repair, or mechanical failure.
Ideally, you should have enough money to cover expenses for six months. Not doing this will give you no financial flexibility or a buffer when things don’t go as planned. Relying on other people or borrowing funds should be avoided and can easily be done by building up savings. Even a small amount of $1,000 can get you out of many financial scrapes.
Using emergency funds carefully is vital to maintain financial health during uncertain times. It can offer improved financial flexibility and allows you to make your money go further. This is so crucial for people who are under financial pressure and in panic mode.
Not Making an Emergency Budget
Having an emergency fund and having an emergency budget are two separate things. The fund is your spending money, and the budget is what you should be limiting yourself to spend.
Many people have a budget that they stick to periodically, but an emergency budget prioritizes survival above everything.
It focuses on essential needs and financial responsibilities and eliminates all luxuries and non-basic expenses. Any unspent money should be added to the emergency fund for further financial security.
Not Sticking to an Emergency Budget
Just because you have some extra income from budgeting wisely, doesn’t mean you should spend it on something luxurious or make poor financial decisions. Even small splurges add up and eat away your emergency fund.
Cashing Out All Investments
When markets crash, many investors contend with pulling money out of stocks and equities, moving them to more secure investments, like money market accounts, bond funds, and even cash.
Some advisors will tell you to ride out the storm when markets are volatile, but that’s easier said than done when assets diminish seemingly on a daily basis.
If you sell at rock bottom prices, you will lose out on the gains that follow; historically, some of the most significant increases, follow downturns after selloffs.
Note that this isn’t the first time, nor the last, that the market dips, and it might be an excellent opportunity for investors to check out their strategy. Although no one has any certainty, it’s wise to wait for markets to return to some normality turbulent times
Not Coordinating with Your Partner
Setting a household budget means that everyone within the household should have aligned strategies and the same determination to save money. Make financial decisions together to evidence support and cooperation.
Using Credit Cards
Although it’s tempting to use loans or credit cards when cash is low, this should be a last resort. There are other ways to save and make money that doesn’t involve getting into debt.
If your income is stemmed and you don’t know when it will return to normal, you won’t know when or how much of the debt can be repaid. Missing loan payments can be detrimental to your credit score, which can cause insurance payments to increase because you’re a higher risk customer. Some employers also run credit checks, so if your credit score is too low, you may not get hired.
Credit works well when balances are paid off monthly, but they can be disastrous when poorly managed. Using a credit card can spiral because no physical cash is exchanged, and you don’t have to worry about the expense until later.
Having debt can often lead to further worry and panic, and as a sensitive subject is often a cause for arguments within families.
If you don’t have the cash to pay it off later, the major downsides of using credit are high-interest fees, risk of hurting credit score, straining family relationships, and to the extreme, bankruptcy.
Not Chasing Benefits
If you rely on benefits to support your income and there are any glitches, don’t wait for them to be self-corrected. Also, with changing incomes, it might be a good time to check if you’re entitled to any more benefits.
Not Seeking Support
Remember that you are not alone when it comes to finances, and many charities and organizations offer financial support during difficult times. Money, and financial decision making, can be an uncomfortable subject to discuss with people you are close to, but take time to talk to a friend, colleague, charity, or even a professional. It’s good to know when you have support and peace of mind that you are doing the right things, which will lead to less financial stress.
Many providers offer discounts or deferred payments when people are having financial woes. Also, check out which expenses can be downgraded or canceled altogether.
If you are having financial difficulties and would like to talk to someone, contact Debt.org who provides advice on financial help for those impacted by COVID-19.
Do you have any great tips for our readers? Have you made any financial decisions in a panic? Please share your ideas in the comments section below.