Investing is the one of the best ways for you to make money with your existing funds. However, the uncertainty and volatility of the economy may lead some consumers to think twice about putting their money into investments – or even worse, making costly financial mistakes.
There’s a reason why we call them common investing mistakes — people fall into these missteps all of the time. If you’re already investing or considering investments, be aware of these eight common blunders.
1. Giving up on investing when the economy slumps
We all know that the economy can be an unpredictable roller coaster. What do you do when the economy slumps?
What you shouldn’t do is give up on investing because of an economic downturn. It may feel like you’re taking on massive losses, but remember: the economy eventually rebounds and inflation will level out at some point.
Don’t bail on investments just because times are tough. If you stick with it you’ll likely find that your investments will pay dividends down the road when the economy improves.
2. Failing to save for an emergency fund
An emergency fund is exactly what it sounds like: a pool of money that you set aside for emergencies. Usually these funds collect enough money to cover expenses for about eight months.
Stashing away an emergency fund ensures you won’t have to dip into investments or retirement funds when you lose a job, experience a sudden illness resulting in hefty medical bills, run into car trouble, or experience any other unexpected expense.
Hot Tip: If you are having trouble building up emergency funds, try one of our budgeting guides. Budgeting shouldn’t be impossible, and we want to help!
3. Investing when you don’t have a cash reserve
Don’t put all of your money into investments; you need to have a reserve of cash on hand to pay for everyday expenses or emergencies. If all of your money is tied up in investments, you’ll have to resort to cashing out stocks that could gain value down in the future. Or even worse, you could end up piling on more credit card debt for emergency expenses.
4. Investing while you have credit card debt
High rates of credit card debt is very common among Americans today. But, as Orman preaches, staying out of credit card debt is crucial to financial security.
If you’re trying to build wealth, the first thing you should do is eliminate credit card debt. When you invest money instead of paying off your credit card balance, you’re essentially giving away money to the bank through interest payments.
Before you start investing, your top financial priority should be eliminating credit card debt.
5. Taking an all-or-nothing approach to selling shares
If you own shares in a company that has taken a dive, the temptation is to sell it all and move on. Conversely, you may decide to wait it out and hold onto all of your shares. But taking an all-or-nothing approach is a mistake — especially if you’re selling in a panic or because of bad advice.
Instead, take a more measured approach and adjust your strategy in real time. Start by selling a few stocks of a poorly performing investment. If it rebounds, you can buy some back. If it continues to plummet, keep offloading your shares.
6. Stopping contributions to your 401(k)
It’s easy to get carried away with your spending, especially in times of high inflation. It might be tempting to lower your monthly retirement contributions or even pull money out of your 401(k). Orman makes it clear this is a big mistake.
By contributing to your 401(k), you’re making a promise to yourself: “I’m going to work hard right now so that I can enjoy life later.” And that’s exactly what happens when you put money into your 401(k): It grows over time. The average growth rate for 401(k)s is 5%-8%.
7. Investing in only stocks or only bonds
Having a diversified investment portfolio is always important; during a recession it becomes even more clear. Don’t put all of your investment eggs in one basket. While some of your investments may struggle, others may do well in a recession economy, keeping you afloat.
Stocks and bonds deliver different rates of returns and levels of stability. Invest in both.
Bonds are considered more stable and safe, but the downside is that the rate of return is generally lower.
Stocks are usually more volatile than bonds. The reward for the higher risk is the potential for larger returns.
8. Spending and investing as normal in a recession
Are we in a recession? According to Forbes – we’re not technically in a recession in part because of a strong job market, but the economy is not in good shape.
Inflation has hit record highs over the last year. Rising prices for food, utilities and other necessities have probably chipped away at your savings account balance.
Instead of proceeding as normal, it’s time to go into survival mode. Cut back on unnecessary expenses and buy only the things you need.
When the economy is performing poorly and inflation is high, it can be tempting to sell your shares, give up on investing, decrease 401(k) contributions, and pile up the credit card debt.
Instead of making these mistakes, finance guru Suze Orman encourages consumers to hold firm and ride out bad times. Eventually the economy will recover and if you make the right decisions, may even come out in a stronger financial position in the long run.