6 Money Mistakes That Hurt the Most During Economic Downturns
A “smart” money move can become an expensive mistake when the economy takes a turn.
Lowering a payment, slashing the budget or moving investments to cash can bring immediate relief. But if the downturn drags on, the tradeoffs can leave households with bigger risks and fewer ways to recover.
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Here are six money mistakes that hurt the most during economic downturns.
1. Betting on One Income
Relying on a single source of income means putting your household at risk should an employer or client cut hours, restructure operations, or lay off workers.
Emergency savings can help, but a side gig can provide immediate cash during a downturn.
The Federal Reserve found that 51% of people doing gig work also had a main job. Thirty-one percent said they would struggle to make ends meet without their gig pay.
Consider freelance work, rental income or turning a hobby into a small business when your steady paycheck feels uncertain.
2. Cutting Necessary Expenses
Eric Pemper, founder and managing member of CuraDebt cautions against cutting insurance, medications, preventive care, or necessary home and vehicle maintenance.
“These cuts may improve cash flow temporarily, but they can create much larger expenses later,” he said. “Protect the expenses that provide financial security, prevent avoidable problems and allow the household to continue earning income.”
3. Raiding Emergency Funds
Draining an emergency fund during a downturn can leave a household short of cash if a job loss or another expensive problem follows.
Christopher Walsh, a financial advisor at Capital Choice Financial Group, warns that without cash reserves, people may be forced to sell investments after they have already fallen in value. Instead, he recommends building cash during uncertain periods, even if that means temporarily reducing investment contributions.
“If they're getting a 401(k) match, I might have them pause down to their match, because the match is a nice feature, so that they can stockpile cash,” Walsh said. “That way if there is a job loss in the future, they've got plenty of cash sitting there to help them weather that type of storm while they might be in between jobs.”
4. Closing Your Credit Cards
“Real damage happens when you close credit cards that are not being used,” said Jethro Adedeji, CEO and founder of Crowned Credit.
Adedeji said closing an account reduces available credit, which can increase credit utilization even when the amount owed stays the same. For example, he said a $100 balance on a $1,000 limit equals 10% utilization. Cut that available credit to $500, and utilization rises to 20%.
He explained that during a downturn, completely abandoning a credit card can backfire. An issuer may cut the limit or close the account, leaving you with less available credit at a time when preserving financial flexibility matters.
5. Taking Out a Home Equity Loan
When everyday expenses and credit card debt keep eating up the paycheck, borrowing against the house can look like a way to breathe again.
“The payment may improve, but the home is now at risk,” Pemper said. “Some borrowers also run their paid-off balances back up, leaving them in a worse position. This can be especially dangerous when income is unstable.”
Before using home equity, Pemper recommends comparing creditor hardship programs and options for managing unsecured debt before putting the house on the line.
6. Letting Fear Call the Shots
Watching retirement savings fall during a downturn can make selling investments feel like the safest move.
In addition, Walsh said some investors pause contributions because they fear the market will keep falling, then forget to restart them. As a result, their money stays on the sidelines and they miss the chance to buy at lower prices and participate in the recovery.
“Typically, they miss the return of the market,” Walsh said. “They miss the couple of best days that would have springboarded them back into position a lot sooner than they thought.”
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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