Suze Orman says you can avoid 5 common mistakes people make in a stock market crisis

1. “You need to start stockpiling now.”

The first mistake people make during a recession is continuing to spend as normal, Orman says. But on top of that, the pandemic has made a situation where Americans want to get out and spend with restrictions relaxed.

Cutting spending now is Orman’s top tip if you’re worried about a recession, she said in an interview in People magazine last month. Only buy necessary items and put the rest aside to save.

“Think of it as an economic pandemic, where you don't spend, you don't go out, unless you have the money to do so,” she said.

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2. “You need an emergency savings fund.”

Once you’ve cut spending, another common misstep is not putting aside money into an emergency fund. We learned yet again during the pandemic why emergency funds are a necessity when many people lost income or their jobs.

A recession could increase uncertainty in the job market, and having an emergency fund to cover costs if you get laid off or have your hours reduced is critical to your financial survival. Orman says aim to save eight months of living costs, but if you don’t get there, that’s all right. Any amount is better than nothing, she says.

“Recessions are Exhibit A, B and C for why you need an emergency savings fund,” Orman wrote in her blog when a recession was threatening in 2019. “Everyone is vulnerable. Everyone!”

3. “Pay off your credit card debt … no excuses.”

Credit card debt is likely your highest debt in terms of interest rates. And if a recession hits, credit card debt should be the first to go, or it could be the first expense that leads to trouble.

If you lose your job and have your hours cut, credit card interest can be “a disaster,” Orman says in the blog post about preparing for recessions.

A great way to prepare is by looking at other credit card companies that may offer you a deal. If you transfer your balance to a new company, it may offer to charge no interest for at least a year. But these offers can disappear in a recession, Orman says, which is why you should take advantage now.

“Transfer your credit card balances to one of these deals and then make it your priority to get all the debt paid off during the time when you are not charged any interest,” Orman says.

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4. “We really don't have to choose between selling all or none of the shares of a stock we own.”

Sometimes people are reluctant to remove some of their money from stocks that are losing value, possibly because they want to avoid capital gains taxes or worry about missing profits if the stock swings up, Orman says.

But she has a trick to handling this situation. Without giving away all her secrets, her basic principle is that you don’t have to view a decision about selling stock as an all-or-nothing choice. Consider selling a bit at a time to keep more of your money safe and and still reap some of the returns if the stock does take off.

You can read her detailed advice in her guide to stocks. Deciding whether to hold or sell struggling stock is certainly a balancing act.

Orman also advises in a recent podcast episode that if you like the mix of stocks you have and you have more than five years until you need the money, then “you have got to stay invested — right here and right now is not the time to come out of the markets if you haven't done so yet.”

5. “You cannot have money in the market that you're going to need within five years.”

This idea highlights mistakes that Orman sees two groups of people making. First, you can’t “cut corners” and stop contributing to your 401(k) or retirement accounts during a recession, she tells People magazine. This can be especially true for younger people who put saving for retirement on the back burner. Instead, treat retirement saving like a bill payment, putting aside the same amount each month no matter what.

But retirees also need to be careful during a market downturn because they may need that cash in the next five years. If that’s the case, it’s important to have a “cash cushion” of three to five years for retirement, Orman says.

“Every month that you put your money into your 401(k), just continue to do it,” Orman says.