We got a mass email from our HR department that listed five things to avoid doing during a turbulent economy. I read through it and the information is solid, but I have no idea where they got it from. I can tell you they’re all avid readers of the National Endowment for Financial Education and Smart About Money so I’d guess it came from one of those sites.

These aren’t anything you probably don’t know, or at least think about, but they’re simple enough that most people may not think about them without a gentle nudge. Of course, those on the panic button have probably done all of these things, but the point is that now is not the time for hasty decisions. So, with that in mind, let’s talk about five things you should avoid doing in a bad economy.

1.) Borrowing money to continue your lifestyle

This is a no-brainer for most of us, but there are those out there who will borrow money just to keep up appearances. If your income has dropped, or you believe that it might, you may want to go ahead and rewrite that budget to reduce your expenditures. Remember, the best way to stay ahead of the curve is to spend less than you make. Don’t worry about what others are doing or how they’re living. Worry about yourselves.

I would add to this piece that if you are going to have a dramatic lifestyle change, you need to sit down and talk to the whole family. I was reading an article the other day about parents buckling down on the budget and saying ‘no’ to the kids when they’ve never done that before. It starts a lot of family fights if they don’t understand. “Because I said so” isn’t a reason, either. Be respectful of their feelings, just as you expect them to be respectful of you. Sit them down and show them the budget and the bills. They may not be interested in learning the finer details, but at least they’d have some idea of why they can’t have those $100 pair of jeans.

2.) Avoid pulling money from your 401(k)

If you’re nervous about the ups and downs in the market, then change your allocation within the 401(k). Remember to keep yourself diversified, but a bad economy is a great time to reevaluate your risk and your goals to ensure you’re on the right track. More importantly, don’t stop contributing to your 401(k), either. If cutbacks are necessary, continue to save to the point of your employer’s match. That is “free” money, so you might as well take advantage when you can! Investments are meant to be long-term vehicles…I can’t say this enough. You will probably lose money in the short-term because that’s the most volatile. However, most stocks, bonds, and funds all have good long-term history. If they don’t, you probably don’t want to be in them; however, that is what your financial planner is for. Ask questions and make decisions based on the level of risk you are comfortable with and not what others are saying about the economy.

I recently had a member who walked in with a check from his 401(k) and told me he’d spoken to several coworkers and they said that now was the time to pull money out of his 401(k). My jaw dropped, figuratively speaking. I immediately set him an appointment with our financial advisor. They’re supposed to meet sometime next week, but now is not the time to be pulling from your 401(k)!

3.) Avoid home equities to fund current expenses

Truthfully, the last thing you need right now is more debt, even if that debt is with a super low rate. If you can’t afford your current expenses, then it’s best to cut back in areas and rework the budget…this sort of goes with number one. The other problem is that given the soft housing market, your home could devalue and it’s never a good place to be in when you owe more than the property is worth. Now, this is separate than those borrowing on their home’s equity for improvements and debt consolidation, so long as it is budgeted and can be afforded. This particular advice is really meant for those using their credit cards and home equities to live day to day.

4.) Distance yourself from retail therapy

A lot of us are guilty of this. When things get bad, we go shopping. It’s a great release to wander through the stores and pick up items we know will comfort us…at least until we get the credit card bill. Now would be an excellent time to reevaluate your spending habits and figure out what triggers impulsive buying. Some ways to help avoid the impulse shopping is to make a list of the things that you need. If you’re going to the grocery store, force yourself to only buy what’s on your list. If you’re going to the electronic store for a specific reason, only buy what’s on your list.

I’m terrible about this myself, and I really have to watch it. I don’t go the mall, but when I’ve had a bad day, nothing makes me happier than to stop at Best Buy and pick out movies I don’t yet own. It’s very costly for me to do this, particularly when I go outside my allotted electronics budget (yes, DVD shopping is included in my budget). So, I’ve been working on limiting myself to only going shopping on Tuesday’s when the new releases come out. It’s helped a little.

5.) Don’t spend on credit if you don’t have to

You guys read me harping on this one all the time…emergency funds are vital! Let’s look at it this way. Let’s say you have a small amount in savings and something comes up. You don’t want to use the money in savings because it’s earning you a little interest, so you decide to use your credit card. Ok, well first of all, most credit cards are in double digits on interest. If you pay it off at the end of the month, that’s not such an issue. However, being that it was an emergency, the chances are that you may be carrying that balance over until the next month. The money sitting in your savings account probably isn’t earning more than 4-5% and that’s being generous in most cases. So, instead of paying 11-15% interest, it makes more sense to forfeit the 4-5% interest from savings.

In case you think this is an unrealistic example, let me tell you, it’s not. I have many members who will come in to make their credit card payments and tell me they had this or that come up. As I’m making the payment, I get to see their account balances. It’s astonishing to me the number of people who had the money in their savings to begin with, yet they used their credit cards. When I ask about it, I always get, “Oh that’s for an emergency.” So what was this, a walk in the park? If you have an emergency fund, use it when you need to and then replenish it.

Now, for those of you who don’t have an emergency fund, it’s the best time to start building one. With it being so hard to get credit and lenders cutting back on limits, it’s better to have the money in the bank, just in case, because you may not be able to rely on credit solely. Here’s a personal story.

Within this week alone, I’ve had to change the brakes on the car ($700) – not just the pads and shoes, but the actual brakes; I’ve had to have the belt and tensioners replaced ($80); I’ve had to put down money for a pet deposit at the new apartment I’ll be moving to because they wanted it upfront ($350); I’ve had to take my cat to the emergency room ($115); I had to follow up with a visit to the vet because the emergency room didn’t do what they were supposed to, which also resulted in surgery for my cat ($150); and I forgot to budget for groceries this month – which I’m not sure how I managed that ($200.) That’s a total of $1595, so for even numbers, let’s just say $1600. I was pretty stressed out this week, but imagine how stressed I would have been if I had not been financially prepared for all of this. Emergency funds are important.

Ok, so let’s discuss these five things. Do you agree that we should resist the temptation to do these things in a bad economy? Have you done any of these lately? Why or why not?

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