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Five Common Mistakes in a Bad Economy
By: Bankrate.com | 23 Sep 2008 | 11:06 AM ET
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Consumers have plenty to worry about during a challenging economy, and making a wrong move in personal finances could make a bad situation worse. Obtaining cash through credit cards, retirement plans and home equity could end up being a costly quick fix. And complacency over personal investments and looming college costs could lead to missed opportunities for keeping hard-earned dollars.

Here's how to avoid some common pitfalls during an economic downturn.

1. Living la vida Visa
One of the most common responses to a financial crisis, such as a job loss, is to continue spending with credit cards, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling.

"We're great spenders but lousy savers," Cunningham says. "We're a hopeful lot of people. We keep thinking that our ship is going to come in."

But the reality is that it typically takes a job seeker one month to replace $10,000 of lost income, she says. So a prospective employee should expect it will take five months to replace a $50,000-a-year job.

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Rather than continue a lifestyle financed by credit cards -- and compounding debt in the process -- consumers should "circle the wagons" by figuring out where they spend their money, Cunningham says.

Just as calorie-counters keep logs of every meal and snack, consumers should keep a meticulous watch on incidental purchases such as meals in restaurants, nights out at the movies, and, of course, gourmet cups of coffee. Think of it as an expense report to yourself.

"Nobody likes to do it, but you can do anything for 30 days," she says. "Tracking your spending is one of the most basic elements of financial stability."

Once consumers have a handle on spending, do they have go cold turkey on all of the good life's trappings? Not necessarily.

Cunningham suggests that cutting back on some expenses is better than cutting them out.

Comb through cable bills, cell phone plans, and other services for lower-cost alternatives. Folks who haven't watched HBO since the finale of "The Sopranos" or never started a conversation with a text message may rein a few bucks per month by dumping these options.

2. Invading your nest egg
Economic downturns have a way of drying up consumers' liquidity. Meanwhile, creditors only get thirstier. But as tapped-out consumers have fewer options to get cash, they may be tempted to withdraw from an IRA or borrow from a 401(k) plan.

"A Double Whammy"...Read More.

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