10 money mistakes you should avoid during a crisis

The economic uncertainty triggered by Covid-19 has upended the lives of many around the world. Sudden job losses and reduced incomes have derailed financial goals and led people to commit costly errors involving their money and investments.

While to err is human, as the old adage goes, it is important that people avoid falling into financial traps that can lead them to further economic hardship. Here, we list the top 10 financial pitfalls to avoid during a crisis to help keep your money goals on track.

1. Don’t spend to make yourself feel better

With advertisements carefully designed to manipulate people’s spending habits, it’s no surprise why so many people have become emotional spenders.

"We often spend when we are feeling sad, upset and even scared," says Carol Glynn, a Dubai-based personal finance coach from Conscious Finance Coaching.

“Think about why you are buying what you are buying and whether you really need it. Or are you experiencing a behaviour similar to emotional eating? If you are, recognise it and put the credit card away.”

Ms Glynn says it is important to take at least 48 hours to think about a large buy. “To prevent buyer’s remorse and ending up with expensive items you don’t need, don’t buy on the spot. Get the relevant information and take at least 48 hours to think about it. This not only makes it more likely you will only buy things you really want, but it also gives you time to shop around for the best price,” she says.

2. Don’t spend more than you earn

In the UAE, many professionals tend to live beyond their means. Luxury is easily attainable here, especially with lucrative tax-free salaries.

The financial rule is that if you keep spending more than you earn and don’t invest in instruments to grow your money, you will eventually run out of it.

“I usually remind investors of the 50:30:20 rule – 50 per cent goes towards the things you need [housing, food, healthcare, etc.], 30 per cent to your wants [dinners, staycations, etc.] and 20 per cent to your financial future,” says Stuart Ritchie, director of wealth advice at AES International.

3. Don’t put all your eggs in one basket

American economist and Nobel laureate Harry Markowitz once said: “Diversification is the only free lunch” in investing. However, the fear of losing money may make people wary of diversifying their investments across different asset classes, such as equities, bonds, cash and property.

“While investors often fixate on the stock market, such as the S&P 500, there is significant value to investing in a balanced fund that includes a healthy allocation to bonds,” Niels Zilkens, lead market head Arabian Gulf at UBS Global Wealth Management, says.

“High-quality bonds usually appreciate when stocks sell off. That’s because stock market sell-offs are generally accompanied by economic slowdowns, which usually result in lower interest rates. When interest rates fall, bond prices rise.”

Experts also suggest that investors diversify within the equity portion of their portfolio. “It can be tempting to allocate more to our home country’s market, and to favour equity markets that have been outperforming more recently. But these temptations can hold significant idiosyncratic risk,” Mr Zilkens says.

4. Don’t rely on loans for your rent

During the peak of the UAE property market, many landlords insisted that tenants pay their rent upfront with one cheque, forcing many to take out expensive personal loans to fund their housing costs. However, with the market softening, many landlords now accept multiple cheques, doing away with the need to take out a loan.

“Ensure you plan ahead and put aside enough money each month into a separate account so when your rent cheque is due, you have cash to pay and don’t need to seek a loan and pay interest on the repayments, meaning your rent is even more expensive than the amount on your lease,” Ms Glynn says.

5. Don’t invest in active funds

The trend for passive investments, for instance, through low-fee exchange-traded funds is growing with every passing day.
Actively managed funds typically underperform when compared to market indices and often come with high fund management fees, Mr Ritchie says.

“Things like timing the market, chasing performance, trying to beat market prices are all futile attempts at successful investment experiences. Invest your money in low-cost passive funds, adopt a long-term strategy and then leave your money alone for the markets to work their magic,” he adds.

6. Don’t forget to save for a rainy day

The economic uncertainty unleashed by Covid-19 has reinforced the importance of having an emergency savings fund worth three to six months of living expenses. This should be left untouched and only used for emergency situations such as a job loss, health scare or unforeseen expenses.

“Emergency funds should be kept in liquid accounts where you can access it quickly and easily. Anything over and above this fund should be put to work, making more money for you,” advises Ms Glynn.

7. Don’t try to time the market

When you try to time the market, you are always worrying if prices have fallen low enough for you to buy, or if they’ve increased enough for you to sell. But how do you determine the perfect time to buy or sell? There’s no magic formula and most investors who try to time the market end up relying on emotions.

“Buy low, sell high might sound like good advice, but it’s a fallacy. A much better phrase to remember is that ‘time in the market is more important than timing the market’," says Mr Zilkens.

According to experts, the cost of waiting to buy on a dip is much greater than the benefit. For instance, Mr Zilkens says that since 1960, an investment strategy of selling the S&P 500 at a record high and buying back after a 5 per cent dip would have returned around 2.5 per cent a year, while a “buy and hold” strategy would have grown 10 per cent a year.

“The problem with waiting for a market drop and selling out at new all-time highs is that you’re invested during the majority of each bear market but miss out on most of the bull market gains,” adds Mr Zilkens.

8. Don’t misuse your credit card

Credit cards are financial tools and aren’t inherently good or bad. It’s up to the cardholder to decide how his or her cards will be used. If you use your credit cards to incur costly interest charges, then they are bad for you. But if you use your credit card as a convenient method of payment and to utilise benefits, then it can be good for your personal finances.

“Credit cards are convenient and often offer great benefits such as air miles, cash back or access to gyms, for example. However, not paying off your credit card balance is a very expensive form of debt, sometimes costing up to 40 per cent per annum,” Ms Glynn says.

Personal finance experts advise users to only use credit cards if they have the discipline to pay them in full each month. Cardholders must also be careful when withdrawing cash on their credit cards as it can be expensive.

“Most banks charge a large transaction fee plus a much higher interest rate on the cash amount withdrawn compared with what is charged on the purchases charged to your card,” Ms Glynn adds.

9. Don’t hold too much cash

Earlier this year, market volatility sparked many to sell their stocks and retreat into the perceived safety of cash. Historically, holding cash has proven to be a poor strategy, leading investors to sacrifice considerable upside, according to experts.

“Cash is not a safe store of value. Over time, the purchasing power of cash is eroded by inflation,” says Mr Zilkens. “Although inflation has been low in recent years, yields have been even lower, which means that cash has lost roughly 14 per cent of its real spending power since 2008. This situation looks set to continue.”

Sitting on excess cash is also costly due to its opportunity cost – the return you could have earned if you had invested your money.

Based on data from investment platform Morningstar Direct, a dollar put in a bank account in 1928 would only be worth $20 today, versus $114 if the dollar was invested in US Treasuries; or $2,092 if invested in a balanced 60 per cent stock, 40 per cent bond portfolio; or $7,432 if invested in the S&P 500.

10. Cancel subscriptions you no longer use

Go through your credit card statement and list all subscriptions you are paying for. Cancel the ones you no longer use. These amounts may seem small but can add up quickly to significant amounts.

“Ask yourself if you really need them. Are you paying for a streaming service you no longer watch or listen to? A magazine subscription you no longer read? Or maybe an audio book service you don’t listen to anymore as you are working from home and don’t spend so much time in the car,” Ms Glynn says.