How to Avoid Doing Dumb Things With Your Money

  • A recession in 2023 looks likely with job losses and lower incomes.
  • Experts say that people often overestimate the warning signs of a recession by confusing their finances.
  • Here’s how you can take control of your personal finances before and during a recession.

Recession warning bells are ringing loudly, which means it’s time to take a long, hard look at your financial situation — and keep a cool head.

We do weird things during the recession, like meatloaf and ice cream, according to food trends experts. We’re also prone to panicking and making mistakes with our money, financial experts and economists told Insider.

Professor Dan Ariely, a behavioral economist at Duke University, says that people have a bullish mentality during a recession, using a “scarcity mindset” that makes them think that worse than it really is.

“When the situation is uncertain, it is very difficult for people to think clearly,” said Ariely. “The recession is about uncertainty and fear.”

The fear

Bloomberg economists recently said they see a 100% chance of a recession in 2023. Goldman Sachs CEO David Soloman said in late October that the U.S. economy is facing a “permanent downturn.” .

A recession, or the fear of a recession, creates a sense of financial hopelessness, experts say. These sentiments can be influenced by negative news about the broader economy. Recessions are often preceded by stock market crashes, which weigh on investors’ minds – indeed, the S&P 500 has lost a fifth of its value this year.

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Ramit Sethi, founder of I Will Teach You To Be Rich, an investment and money management education website, says his clients are often influenced by news about the broader economy rather than what’s happening in the economy. his own money.

“People look at headlines on the news, they look at what their friends are saying, and that’s how they see the world,” he said. “That’s why I’m getting more questions than ever about inflation.”

Sethi advises people to focus on their long-term financial plans rather than negative headlines.

Chad Rixse, director of financial planning at Forefront Wealth Partners, says people can be emotionally affected by a fall in their wealth and act irrationally to protect what’s left – even as the stock market and the economy turn.

“When people see their portfolios decline by 20% a year, they start to have an emotional reaction to it,” he said. “It’s hard to keep the big picture under perspective.”

With so many competing thoughts and unintended indifferences, it can be difficult to understand how to calmly navigate a recession without ruining your finances.

“When things are uncertain out there, you want to give people control,” Ariely said. “It takes a lot of willpower and self-discipline to deal with money. People need to be motivated to do it.”

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He added: “If we want people to respond positively to the time crunch they need to feel empowered to make good decisions. And if people feel out of control, it’s not just going to have an economic impact, it’s going to have great mentality too.”

Keep a cool head

Jeremy Schneider, founder of financial coaching website Personal Finance Club, says for most people, preparing for a recession is like preparing for a hurricane.

“Do the same during bad financial times as you do during good financial times, living below your means, building a sound financial system by paying down your debt.” the loan, saving three to six months of emergency money” is worth the expense, he said.

“Maybe if you think your career will be affected by the recession, you can put it on the higher end – like six months plus – and then invest early and often. something.”

If you’re not sure about your finances, it’s time to start building an emergency fund through new savings and spending habits, experts advise. These are good habits regardless of the economy.

Nikolai Roussanov, professor of finance at The Wharton School of the University of Pennsylvania, said that the biggest mistake is not to save before the strike. “The recession kind of reveals potential problems for people,​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​ or and/or/ In good times, with low interest rates, your outlook can be clouded by liquidity, he said.

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Stick to the plan

Sethi says that effective recession planning is like good parenting. “Self-confident parents have confidence through competence,” she said. “They study, they practice, they ask for advice from people they trust and then they stick to the plan. It’s the same with money.”

When building an emergency fund, experts recommend that you avoid investing in index funds and other sources to fund it.

Roussanov said that investors are often quick to withdraw their investments early. Rixse encourages dollar averaging during recessions to minimize investment costs.

Emilie Bellet, founder of Vestpod, a website that aims to empower women’s finances, says it helps to be philosophical about your money and why you spend it.

“Think about what money really means to you, your values, and your future goals,” he said. “Don’t try to have what others have, and be true to yourself because it’s easy to get caught up in comparing yourself to others.”


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