6 Finance Mistakes to Avoid During Times of Crisis
When catastrophes like COVID-19 strike, they can cause us to lose control. One area where control can be tough to get back is our finances.
Being in control of your finances doesn’t mean you should sacrifice your health for a few bucks. If a stress management app would help you take better care of yourself, it’s worth the investment. Getting the occasional pizza with friends is a great way to maintain your social life.
The trouble starts when you let your emotions drive your financial decisions. When you’re stressed, you may overspend to blow off steam. Because they’re familiar, you may stick to your existing financial setup instead of exploring avenues that could save you money.
What are the biggest mistakes to avoid? These six stand out:
1. Not building a new budget
In a crisis, there’s a good chance your financial circumstances will change. Your employer may go out of business, causing you to lose your job. Your mortgage’s interest rate may change. You may find yourself spending more in certain areas, such as healthcare or groceries.
Be proactive. Build a “skinny” budget that reflects your current needs and financial uncertainty. Maybe you need to shift some of your restaurant spending over to grocery stores. Maybe you need an Amazon or Instacart subscription to get things delivered to your house.
Think, too, about worst-case scenarios. If push comes to shove, which bills can be put off? Which creditors might give you some grace? Reach out: You might be surprised at how many of your lenders are willing to work with you.
2. Failing to shop around
A financial crisis can be a great time to switch up your financial providers. You’re likely stuck inside, and many online-only financial services save you money because they don’t need to pay overhead to maintain branch locations. Use your downtime to research alternatives to your current investment, checking, savings, and financial management tools.
Many mobile trading apps let users make unlimited commission-free trades. Some app-based banking services offer a debit card with no hidden fees or account minimums. Other money management apps show all your subscriptions and recurring bills in a single interface, making it easy to pay, adjust, or cancel them.
3. Panic selling
There’s no better investment than the U.S. economy. Still, that truth can be tough to keep in mind when the market crashes and your investment portfolio is bleeding money.
All stock market stumbles are temporary. The economy grew stronger than ever after the Great Depression. After the September 11 terrorist attacks and the financial collapse of 2008, the same thing happened: A temporary dip preceded an expansion.
The same thing will happen with the coronavirus uncertainty. Unless you need to access your investments to cover your essential costs, the best way to ensure that you don’t lose your money in times of crisis is to not liquidate your portfolio. Stay calm, and remember that the economy will pick back up soon enough.
4. Panic buying
If you find yourself in the financial position, it can be tempting to sink more money into the market during a crisis. It’s true that your assets will grow in value as the economy rebounds. But for a different set of reasons, panic buying is just as dangerous as panic selling.
During times of uncertainty, “good deals” can be deceptive. A stock may be down because of a temporary dip in the wider industry — or it might have crashed because of internal struggles that will last long beyond the current crisis.
If you’re a beginner, the best strategy is to hold your assets. A cheap stock that continues to sink after the broader market recovers isn’t actually a good deal.
5. Going to the wrong lender
If you find yourself in a tough financial position, you may need to take out a loan. But beware: Some loans are much more expensive than others. The APR on payday loans can top 500%, for example.
The best options if you need a little extra cash are:
- Friends and family
Always ask your friends and family before going to another lender. It can be tough to swallow your pride, but the people who care about you will be glad you did. They may be willing to lend you money at no interest or at least at lower rates than you could get from a bank or other creditor.
- Personal loans
Bank loans tend to be the cheapest way to borrow money on the market. Depending on your credit, you may be able to find a loan with an APR as low as 4%. A bank you have an existing relationship with may even be willing to extend the loan term, which can reduce your monthly payments.
- Low-interest credit cards
Credit cards aren’t a good long-term solution. But if you fall a few hundred dollars short one month, a credit card is usually cheaper than payday loans, auto title loans, or cash advances. Ideally, take advantage of an introductory period on an existing card, which may let you borrow temporarily at 0% APR.
6. Soothing yourself with shopping
In many of us, isolation produces fear, boredom, and a desire for normalcy. If not kept in check, those emotions can turn into an urge to shop online.
There is a reason it’s called “retail therapy”: Buying things can make you feel good. You might be tempted to buy new clothes for the vacation to Aruba you’re planning to take once this is over. Maybe your house could use some new furniture and home decor.
Although those kinds of purchases might bring you joy in the moment, they can also put you deep in debt. Avoid the temptation. Unless it’s a necessity — think food, healthcare, shelter, or utilities — don’t pull out your wallet. No sale or discount is worth putting your financial security at risk.
In a crisis, you have to keep a tight leash on your money. That doesn’t mean you shouldn’t spend on things you need, but it does mean your finances are likely to look a little different.
Bonus Tip: Another way to respond financially in times of crisis is to have a side gig supplementing your income. Jobs like Merchant Services Sales are always in demand and need good sales people to keep them going.
Whatever your situation, stay positive. We’re in this together, and when it ends, we’ll be better at managing our finances.