This post can be found en Español here.
The entire world has seen quite the upheaval in the past several weeks. Just about every aspect of life has been affected, from jobs to school to leisure to travel. With all of the economic uncertainty, here are some of the biggest financial mistakes people make (and how to avoid them!)
Not having an emergency fund
Ok, the first one is either a gimme or not fair, depending on where you fall. If you’ve already got an emergency fund in place, then good for you! I’m sure that it is providing you with a bit of a sense of security in these uncertain economic times. If you don’t or didn’t have an emergency fund, I know that it’s a bit like kicking you when you’re down. This is especially true if you’ve experienced a job loss or a cutback in your income. Still, if this applies to you, resolve that when you get back on your feet that the first thing you’ll do is get yourself at least $1000 in an emergency fund for rainy day expenses.
Not having a budget (or adjusting it!)
The next mistake to talk about is not having a budget. While some people think of a budget as a “4 letter word”, there’s a better way to think about a budget. Instead of viewing your budget as your enemy, instead, see it as a guide to keep you from spending money on things that AREN’T important to you, so you still have money to spend on the things that ARE. Having a budget and tracking your expenses can help you realize where you’re spending your money, so you can make sure it’s in the right places. A free tool like Mint is a great way to track your finances.
A related mistake, especially in times like these, is not adjusting your budget when your financial situation changes. For example, you might be spending more money on utilities now that everyone is home, but perhaps that’s balanced out by lack of spending on gas! Or increased grocery budget is compensated by less spending on cell phone data, Starbucks runs and evenings out. You’ll never know until you start tracking things.
Trying to go it alone
Remember too that you’re not alone. Money can be a topic that people don’t feel comfortable sharing with others, but it’s important to find someone that you feel comfortable talking about your finances with. If you have a spouse, parent or family member – that’s great. If not, maybe you can be “accountability” buddies with a trusted friend. Many people also find a good deal of value in finding a financial advisor to help guide them.
Whoever it is, it’s important to have someone involved to both help you do the right things with your money and also make sure you’re confident that you KNOW you’re doing the right things. Trying to go it alone leads to making hasty and possibly irrational and emotional decisions.
Looking at your 401k statements
I get the feeling – you read all of the negative news coming out of the stock market and start looking at how badly your 401k and other investments have been gashed. If you can, resist the urge to compulsively check your brokerage statements all the time. If you do, you run the risk of making another one of our mistakes, which is to…
Selling your stocks after they go down
… panic-sell your stocks after they go down. It’s true that we’ve had some of the biggest downturns in stock market history recently, but it’s also true that historically some of the biggest increases have followed major selloffs. If you sell at the bottom, you’ll lock in your loss and miss out on the gains that follow. Famed stock investor Warren Buffet has said that you should “be greedy when others are fearful and fearful when others are greedy”.
Nobody can accurately and consistently know when exactly the stock market will go up or down, so the best advice is to just stop looking at your brokerage statements and wait for the markets to come back up. If you have the cash to spare, it can even be worth investing more when the markets go down. Another way to look at a 20% downturn in the market is that stocks are on a 20% off sale!
Not having a diverse portfolio
The last mistake that people make is not having a diverse portfolio. Now the middle of a stock market downturn may not be a great time to adjust your stock holdings, but in an ideal world, you should hold a variety of different types of investments. Stocks, bonds, cash equivalents and other types of investments all can play a part in a diverse portfolio. Many different types of investments are negatively correlated with each other. This means as some go down, others go up, which can help dampen out some of the market volatility.
This especially holds true the closer that you get to retirement, where you’ll need to start withdrawing some of your investments to live on. If you happen to retire right in the middle of the downturn, the worst thing you can do is sell your stocks, so it’s helpful to have other asset classes (bonds, cash equivalents, whole life insurance) that you can withdraw instead. That can give your stock investments time to go back up.
Hopefully talking about some of these big financial mistakes can help you avoid them and keep yourself on the road to financial success and stability!
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