Recessions make us do stupid things with our money.  Here's how to keep a cool head and avoid bear traps.

Recessions make us do stupid things with our money. Here’s how to keep a cool head and avoid bear traps.

  • A recession in 2023 seems very likely, which means likely job losses and lower incomes.
  • Experts say people often overreact to warning signs of a downturn by gambling with their money.
  • Here’s how to get your personal finances under control before and during a recession.

The recession alarm bells are ringing loudly, which means it’s time to take a hard look at your financial situation, while keeping a cool head.

According to food trend experts, we do weird things in a recession, like comfort food meatloaf and ice cream. We’re also more prone to panicking and making mistakes with our money, personal finance experts and economists told Insider.

Professor Dan Ariely, a behavioral economist at Duke University, said people have a herd mentality during a recession, employing a “scarcity mindset” that makes them think things are worse than they are. really aren’t.

“When things are uncertain, people have a really hard time thinking straight,” Ariely said. “Recessions are synonymous with uncertainty and fear.”

The fear factor

Bloomberg economists recently said they saw a 100% chance of a recession in 2023. Goldman Sachs CEO David Soloman said in late October that the US economy was facing a “prolonged downturn.”

Recession, or the fear of recession, triggers a sense of financial desperation, experts say. These feelings can be influenced by bad news about the economy in general. Declines 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.

Ramit Sethi, founder of I Will Teach You To Be Rich, an educational site on investing and managing finances, said his clients are often more influenced by news about the broader economy than what’s going on. going on with their own finances.

“People watch the headlines in the news, they watch what their friends are talking about, and that creates their view of the world,” he said. “That’s why I now get more questions than ever about inflation.”

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

Chad Rixse, director of financial planning at Forefront Wealth Partners, said people can be emotionally affected by large declines in their wealth and act irrationally to protect what’s left – even if stock markets and the economy are down. cyclical.

“When people see that their portfolios are down 20% for the year, they start to have an emotional reaction to that,” he said. “It’s hard to keep the big picture in perspective.”

With so many competing thoughts and unintended irrationality, it can be hard to figure out how to calmly navigate a recession without damaging your finances.

“When things are uncertain in the outside world, you want to give people a sense of control,” Ariely said. “Managing money well requires a lot of good will and a lot of self-control. For that, people need motivation.

He added: “If we want people to react well to the recession, they have to feel empowered to make good decisions. And if people feel out of control, it will not only have an economic impact, but also a significant psychological impact.”

keep a cool head

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

“Doing the same things during tough financial times as you did during financially good times, i.e. living below your means, building a good financial framework by paying off your non-mortgage debt, saving a emergency three to six months’ worth of expenses, he said.

“Maybe if you think your job might be affected by the recession, you could put that in an upper end – like six months plus – and then invest early and often. And invest before, during and after the recession because markets are volatile. things.”

If you’re unsure of your finances, it’s time to start building an emergency fund through new saving and spending habits, experts advise. These are good habits regardless of the state of the economy.

Nikolai Roussanov, professor of finance at the Wharton School at the University of Pennsylvania, said the biggest mistake was not saving before a downturn hits. “A recession kind of reveals the problems people may have, and not necessarily paying much attention in good times,” he said. In good times, with low interest rates, your view can be clouded by the ease of getting credit, he said.

Stick to the plan

Sethi says effective recession planning is like good parenting. “A confident parent has confidence through competence,” he said. “They’ve learned, they’ve practiced, they seek advice from other people they trust, and then they stick to the plan. It’s the same with money.”

When building an emergency fund, experts advise against cashing in investments from index funds and other sources to fund it.

Rousanov said investors are often likely to withdraw their investments early. Rixse encourages dollar averaging during a recession to smooth out the cost of investing.

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

“Think about what money really means to you, your values ​​and your future goals,” she said. “Don’t strive for what others have and be true to yourself. It’s easy to get caught up in comparing yourself to others.”


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