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10 money mistakes people make in a recession Back to video

Canadians are used to tough winters. But the freezing temperatures and seemingly endless snow is the least of our worries.

It’s the economic storm that’s the cause for concern, that some economists anticipate will lead to a recession in 2023.

Inflation is still sitting at 6.9 per cent, despite the Bank of Canada raising interest rates seven times in a row this year. The result is the key interest rate sitting at 4.25 per cent — the highest it has been since January 2008.

And it doesn’t look like rates will be going down any time soon. In December, Bank of Canada governor Tiff Macklem said that raising rates too little is a ‘greater risk’ than raising them too much, a move that some economists say could trigger a recession.

During uncertain times, it can be easy to make rash decisions that only make things worse. As you prepare for a potential recession, here are 10 financial mistakes to avoid.

1. Pulling out of the market without a plan

If watching your investments go into the negative makes you nervous, you are not alone. But what you do as a result is what’s most important.

During a market downturn, investors often sell off their equities without a solid plan for when and how they’re going to buy back in.

If you find the idea of managing a portfolio during a recession to be too stressful, you might want to use an automated investing service — sometimes called a robo-advisor — to manage your investments for you.

Robo-advisors like Wealthsimple will make all the tough decisions, like what to buy and when to sell, and automatically update your portfolio as the market changes. All you have to do is tell them how tolerant (or intolerant) you are to risk.

2. Not upskilling while you have a chance

Recessions are scary for a reason. Companies often lay off workers, put a freeze on hiring, or both.

While it can be tempting to put your head down and try and hold onto your current job, the best thing you can do is up your chances of career advancement.

Even if your career is recession-proof, you never know what the world could throw at you – like a pandemic. There’s no downside to building new skills, so they are ready when you need them the most.

You don’t need to spend a lot of time or money going back to school. Online courses allow you to learn directly from industry experts and develop new skills that will make you more marketable to in-demand businesses.

And for creative types, check out an online community that offers classes on such topics as design, illustration and photography or video.

Then put your newly learned expertise to good use by freelancing. Consider signing up with a platform that allows you to offer your services to those with needs that match your skills.

3. Not having an emergency fund

If you haven’t saved enough money for a rainy day, you might be in for trouble. Now is the time to start saving for life’s unexpected moments — before they happen.

Most financial experts recommend maintaining an emergency fund that will cover at least six months of your basic expenses — things like rent, bills and groceries.

Even if you have a secure job, there are other emergencies that might derail your finances, like illness, a car accident or even the loss of a loved one.

If you still have a steady stream of income coming in, it’s wise to set a portion of it aside for emergencies each month in a high-interest savings account.

Some high-yield accounts earn as much as 2.5 per cent interest on every dollar you save, which means you’ll have more money available when the time comes to tap into your emergency fund.

4. Not tapping into your savings when you need to

If you are a pretty diligent saver, it can be hard to break the glass in case of emergency. That’s because you’ve likely spent years squirrelling away your hard-earned money, and it can be painful to use your parachute.

But that’s what it is there for.

The definition of emergency doesn’t necessarily have to be what you had in mind. You might have it earmarked to only use in case of a job loss, but it is totally fine to use if your pet needs surgery, your car dies or your furnace needs replacing.

It is often better to use your emergency fund in a pinch if it means you can avoid taking on new debt.

5. Ignoring your credit score

When money’s tight, you might be tempted to just put your head down and not check your credit score until things return to normal.

But ignoring your score can come back to bite you when you need it most. A bad score can mean a high interest rate on credit cards, loans and even a mortgage. This can be a path towards more debt, which can make your score lower.

To make matters worse, a low credit score can make it harder to rent an apartment, or even get certain jobs, like those in the financial sector.

To keep an eye on your score, you may want to sign up for a free credit-monitoring service, like Borrowell.

You can personally check your credit score as often as you’d like, and there are tools to help you improve it. It only takes Borrowell. and it won’t cost you a dime, so there’s really no excuse not to monitor your score.

6. Not preparing for the unexpected

Trying to make ends meet during a recession is extremely stressful, and the financial uncertainty can take all your energy. But failing to prepare for the unexpected could leave your family in jeopardy if something happens to you.

To make sure your loved ones are protected no matter what, you should probably have a solid life insurance policy in place —  even if you’re young and healthy.

Free sites like PolicyMe will let you compare quotes from multiple reputable insurers, like BMO and Manulife, making it easy for you to find the best coverage for the best price.

Best of all, you won’t need to haggle with an insurance agent or fill out mountains of paperwork. PolicyMe will PolicyMe for you, free of hassle and free of charge.

Shopping around first can save you hundreds of dollars a year on life insurance and give you one less thing to worry about during this difficult time.

7. Sticking with all those subscriptions

Streaming services were a godsend for those of us stuck at home during the pandemic, but the price of maintaining multiple subscriptions can quickly pile up. And chances are you aren’t making the most of them anyway.

While deleting your Disney+ won’t give you the financial freedom to retire tomorrow, there’s no use paying for subscriptions you barely use just because you’ve set them to automatically renew each month.

Take stock of your viewing habits and cut out any streaming service that you don’t use at least once a week.

If you cancel a subscription and find that you miss it, you can always sign up again when your financial situation is a bit more stable. You might even be able to take advantage of a trial offer and get a month or two for free.

8. Raiding your retirement fund

When money is tight, it is tempting to want to borrow from your RRSP. But that cash today can have some major consequences, at tax time and again at retirement.

Whatever you withdraw from your RRSP will be taxed as income, so you’ll lose a sizable chunk of your savings right off the bat. You’ll also permanently lose your contribution room, reducing the amount you can save and invest in the future.

Remember, no matter what’s happening today, you still need to plan for tomorrow.

If you need cash quick and you don’t have an emergency fund, a better option might be a personal loan. Free services like Loans Canada can help you find the best quote and best repayment term available for your situation.

9. Getting overly sentimental about your home

If you’ve lost your job, are facing a higher mortgage rate and are struggling to make payments, it could be time to move.

People faced with the prospect of downsizing during a recession will often try to tough it out because of the sentimental value their home holds. Moving’s no fun, either.

But overextending yourself to stay in your current home could decimate your savings, and you may still wind up in foreclosure if you’re unable to keep up with your monthly bills.

A site called Properly can show you how much you’d be able to make by selling your current place. It’s currently only available in Toronto, Ottawa and Calgary, but if you live in one of those cities it’s worth checking out — even if you’re just curious.

If you want, Properly can also provide a guaranteed backup offer for the sale of your home. That will allow you to move ahead immediately and buy a new place that’s a better fit for your financial situation, confident in the knowledge that you’ve always got at least one buyer lined up.

10. Taking on new debt

When money is tight, it can be easy to turn to credit cards and lines of credit to float you till payday. But that behaviour can come back to haunt you if you can’t make a payment due to a job loss.

Likewise, consider your overall expenses before signing a new car lease, or signing a loan or mortgage with a family member. If your financial situation changed, can you afford to keep up with these large payments? It might make sense now, but make sure you have a plan if a recession changes your financial situation.

This article was created by Wise Publishing. Wise is devoted to providing information that helps readers navigate the complex landscape of personal finance. Wise only partners with brands it trusts and believes may be helpful to the reader. This article provides information only and should not be construed as advice. It is provided without warranty of any kind.