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There are many factors that make it hard to save money today, from the high price of groceries to the high interest rates on credit cards. Inflation. If you’re feeling a pinch, you’re not alone. It’s difficult to afford daily expenses and to save for financial goals, like having an emergency fund.

When it comes to covering a $400 unexpected expense, 37% of adults said they would have to borrow, sell something or not be able to cover the expense, according to a 2023 survey from the Federal Reserve. And emergencies can be more expensive than that $400 figure.

Beyond emergency funds, saving for other goals, like the down payment on a house or one’s retirement, are also feeling as if they are hard to achieve. These are worthwhile goals that build wealth. But how do you begin saving when everything is so expensive?

Read on to learn 14 reasons why you’re likely having trouble saving money, plus tips for how to start stashing away more cash.

Challenges of Saving Money in Today’s Economy

Here are some of the most common reasons why you may find it hard to save money.

1. Not Focusing on Paying Down Debt

Having debt is one of the reasons many people have difficulty saving money. The urge to pay it off vs. save is strong. That’s especially true if you’re carrying revolving debt, like debt from credit cards. Interest rates on these types of accounts can change, which may mean that you’re owing even more money in interest than you may have thought. Right now, the range of interest rates on credit cards is around 13% to 27%.

American household debt hit a record high of $17.69 trillion in early 2024, according to the Federal Reserve. This debt includes student loan debt, credit card debt, mortgage debt, and personal loan debt. Some of this debt can be low-interest, like many mortgages, which also help a person build equity.

The kind of debt that typically prevents a person from saving is high-interest credit card debt. Paying that down by consolidating debt with a low- or no-interest card or by taking out a lower-interest personal loan can be good solutions.

2. Budgeting is a Non-Factor

Budgeting can sound intimidating, but assigning a dollar to all aspects of your cash flow can ensure that you don’t lose track of money. Recently, the average household earned $74,580 before taxes, according to U.S. Census data. Of that money, necessary expenditures — housing, food, health insurance — ate up the majority of the money, leaving little in free cash flow.

This “free cash flow” isn’t free, of course. It’s money to be put toward paying down debt, building an emergency fund, as well as paying for extras, like vacations and nights out. Knowing exactly how much you have and tracking your spending can help you put some money into savings. Try one of the popular budgets, like the envelope system or the 50/30/20 rule (which has you put 50% of after-tax money toward needs, 30% toward wants, and 20% toward saving), to take control of your cash.

3. Trying to Impress Friends With Money

Maybe friends invite you to a pricier-than-expected restaurant and you go along, only to split the painfully expensive check. That’s an example of FOMO (Fear of Missing Out) spending, which is an update on “Keeping up with the Joneses). Or perhaps you get a bonus and blow it on a status wristwatch to feel as if you fit in with your big-spender pals.

If you feel like you’re always spending money with friends, consider ways to potentially minimize that outflow of cash. Hikes, potlucks, and checking out local events can all be ways to cut down on these costs. They are relatively easy ways to save money. Or you might go back to that budget you created (see #1) and make sure you stick to it when it comes to splurge-y spending.

4. Not Earning Enough Money

It’s important that the money you earn be able to cover all your expenses. And sometimes, when your expenses increase unexpectedly, your paycheck doesn’t stretch as far as you need. Making and sticking to a budget can help you understand how much you’re spending each month, and can clue you into increases.

For example, say your rent renews 10% above what you were paying last year or your auto insurance increases. That money needs to come from somewhere. You might consider the benefits of a side hustle. Maybe you can sell the jewelry you make on Etsy, get a weekend job at a nearby cafe, or drive a ride-share from time to time.

5. Not Having an Emergency Fund

Saving for emergencies is important for many reasons, one of which is to have an emergency fund. An emergency fund is what it sounds like: Cash that can cover an emergency, which can be anything from a blown tire to a trip to the vet to covering expenses if you were unexpectedly let go from your job. Having an emergency fund relatively liquid and easy to access in a high-yield savings account (rather than in investments) means you can tap into it relatively quickly if you were to need it.

Most financial experts advise having three to six months’ worth of basic living expenses in an emergency fund. Set up regular transfers from your checking account to fund that; even $25 a week or a month is a start. Consider putting a windfall, like a tax refund, there as well.

6. Shopping Too Much

Shopping too much doesn’t mean always filling your online cart or always having packages at the doorstep. It could just mean that you’re not being strategic about how much you’re paying. For example, buying groceries every day at a nearby gourmet grocery could be much more expensive over time than doing a weekly or bi-weekly shopping trip to a warehouse club.

Making lists, tracking items over time, and making sure you get the best price by using coupons and cash back offers are all ways that can help you save money and even have fun while doing so.

7. Inflation in Housing, Education and More

Sky-high housing prices. Rising tuition costs. And interest rates that are increasing. Inflation can make everything more expensive. This can make it challenging to figure out how much to save, especially if you’re saving for a house or putting aside money for tuition. Inflation can also make smaller things, like grocery runs, more expensive too. Overall, rising prices can make it feel difficult to save money, let alone keep your checking account where you want it to be.

Take a deep breath and remind yourself of the cyclical nature of the economy. America has had recessions, a Great Depression, and plenty of inflation before. Persevere and be money motivated: Do your best to control spending and save, if possible, 10% of your take-home earnings towards your future goals.

8. Paying for Items We Don’t Use

How much stuff do you own? Probably way more than you regularly use. And it’s not only physical stuff. Unused digital subscriptions and wasted food…all of it adds up to spending money on things we don’t need.

One quick way to get that money back: Go through your last month of bank account payments and note any money you spent on subscriptions. Chances are, there are at least one or two you either don’t use or use so rarely you can let them go without missing them. For instance, check out how many streaming channels you are paying for. It could save you hundreds of dollars a year if you lose one or two.

9. Saving Money is Not Our Priority

If you wait until the end of the month to put aside whatever you have left, chances are there’s no money left. That’s why prioritizing saving is so important. Learning to save can be a skill, and employing smart strategies can help you make sure that you keep that skill strong.

For example, you can automatically transfer money from your paycheck into savings, so you don’t see it sitting there and aren’t tempted to spend it. Budgeting apps can also be helpful to curb spending so you have more money to save.

10. Cost of Living is Rising

We’ve touched on inflation hitting the large things we’re saving for, and the small things we buy every day. Inflation is notable across so many spending categories: The World Economic Forum found that food prices increased worldwide by nearly 10% from January to April 2022 — the largest 12-month rise since 1982. This past year, they rose just 1%, but rising less swiftly of course is very different from seeing costs move lower.

There are various ways to manage this. One way to get a quick cash infusion is to sell things you have but no longer need or use. This might be gently used clothing, a laptop that’s sitting unused, or that mountain bike that is gathering dust. You can try a garage sale, Nextdoor, Craigslist, or local Facebook groups, or (if it’s something small) eBay or Etsy.

11. Spending Too Money On Social Activities

All too often, hanging out comes with a price tag. After dinner, or a show, or drinks you’ve depleted your bank account. Setting up a budget for socializing can help you spend money wisely. You might check out the restaurant in your neighborhood you’ve been dying to try when they have a reasonably priced prix fixe menu; that way, you’d still have space to save. Thinking of cheap activities and researching free things going on in your community (music, fairs, and more) can help you go out without the steep price tag.

12. Lifestyle Creep

If you’re not familiar with the expression, lifestyle creep is when increased income leads to increased spending. As your pay goes up, you may feel justified in moving up to a rental home with more amenities. You may be more likely to go to more expensive hotels when traveling and join pricey gyms. Lifestyle creep can make it tough to pay down debt, boost savings, and build wealth.

Upgrading your leisure habits when you make more money isn’t a bad thing — but it can be something to be conscious of, especially if you feel like you aren’t saving enough. This may be a good moment to pick and choose your perks. If you are moving to a more expensive apartment, say, maybe you skip that quick vacation you were thinking of taking. Or you could come up with fun ways to save money, like monthly challenges. For instance, don’t buy any fancy lattes for a month and put the money in savings. You may be surprised by how much you save.

13. Not Thinking Ahead

One big reason it’s so hard to save money is that we are so rooted in the present. It’s a real challenge to imagine our toddler needing college tuition money or ourselves being old enough to retire. It can be easier just to put those thoughts to one side for a while.

But when that happens, the opportunity for compound interest is lost. For instance, if Person A were to save $1,000 a month from age 25 to 65, accruing 6% interest, they would have more than $2+ million in the bank at age 65. If Person B saved the same $1,000 a month from age 35 onward until they turned 65, they would have about $1,000,000, or half as much!

By budgeting, planning ahead, and saving, you can have financial discipline and enjoy these kinds of results. It’s important to remind yourself to take care of tomorrow as well as today.

14. Spending Money is Easy

Whether you’re out and about or scrolling through your phone, opportunities to spend money are everywhere. You see a delicious poke bowl while running errands, or you’re looking at your friend’s baby on Instagram, and there are those vitamins everyone is talking about. Ka-ching.

It’s definitely a challenge to grow your money mindset and be able to ignore all of these temptations and focus on longer-term financial goals. Namely, saving for “out of sight, out of mind” future needs. Here’s where your budget can once again be helpful. By having a small stash of cash for fun, on-the-fly expenditures, you can treat yourself (something we all need now and then) without blowing your budget. You will likely be a more mindful and careful consumer if you know, say, that you have $25 this week for a reward.

The Takeaway

Yes, it can be hard to save money due to rising costs, high interest rates, FOMO, lifestyle creep, and other forces. But if you focus on saving money, you’ll find more and more ways to maximize the money you do have. One of the ways to do so is to look for a banking partner with low (or no) fees and high interest rates.

Take a look at what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What are the challenges of saving money?

An increased cost of living, lack of a budget, and other factors can make it hard to save. Add in temptations to spend, social pressure, and the fact that a purchase can momentarily lift your spirits, and you have plenty of reasons why saving can be challenging. The good news: A few behavioral tweaks (such as finding a budget you can really follow) can help you save money and make the most of every dollar.

Do millionaires struggle to save money?

Yes. Studies and surveys have found that even high earners live paycheck to paycheck. Fortunately, there are always ways to save, regardless of the size of your bank account. The same rules of budgeting, setting up automatic transfers into savings, and being a smart consumer can help anyone.

How do you stay motivated when it’s so hard to save money?

Motivation varies. Some people find it motivating to see their credit card balance go down, other people like to see their retirement account balance grow, and still others like to mix it up and give themselves a different saving challenge each month. The trick is finding a strategy that works for you.

Photo credit: iStock/sorrapong
SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOBNK-Q324-021

One of the obvious perks of working from home is the opportunity to cut some expenses, whether that’s from reducing commuting costs, prepping lunch at home, or cutting back on the cost of buying (and cleaning) work clothes.

However, there are other costs that might ratchet up just because you’re home more — and that includes energy costs. The extra time you may be spending on your laptop, keeping the lights on, or even boiling water for a ramen lunch could nudge your energy usage upward — and your monthly electric bill.

If you have those bills set on autopay, you may not have noticed an increase. Or maybe you noticed the expense creep up but didn’t know what you could do to manage it.

Fortunately, with some planning, you can probably minimize your energy bill. Here are some strategies that might help while you’re working from home.

In the Home Office

You may have put some thought into setting up your office in a way that works ergonomically and looks presentable on Zoom. But have you thought about making your workspace energy efficient?

Choosing Power-Saving Equipment

If there’s a choice, consider using a laptop instead of a desktop computer to do your work. According to Energy Saver, the U.S. Department of Energy’s (DOE) consumer resource, it takes much more power to run a desktop and its monitor than it does to run a laptop.

And with the laptop, there’s a battery for backup if the power fluctuates or there’s a brownout due to high electricity demand in your area.

Those who are new to working at home and purchasing their own office equipment may want to check out Energy Star®-certified computers, monitors, and printers, which run more efficiently than standard equipment and use about half as much electricity.

💡 Quick Tip: Help your money earn more money! Opening a high-yield bank account online often gets you higher-than-average rates.

Unplugging at the End of the Day

Remote workers aren’t the only ones who can benefit from a break at the end of their day. The computers, phone chargers, and other pieces of office equipment they rely on may continue to draw power even when not in use.

For convenience, workers may want to consider attaching these “energy vampires” to a smart power strip, with just one easy-to-reach switch to flip when it’s time to call it quits.

Also: Not to be a Grinch, but come the holiday season, if you like to keep the holiday lights on all day to brighten your work area and deliver a holiday mood, you might rethink that. The cost of holiday lights can add up.

Recommended: Adjusting Your Budget for Working from Home

Letting Computers Take a Nap

Another way to save money on energy is to set a computer to sleep or hibernate if it’s going to sit idle for a while. This differs from using a screen saver, which actually may take extra energy to keep an animated display active on the screen.

When a computer enters sleep mode, the power is cut to any unneeded systems, and the memory receives just enough power to maintain data.

In hibernation mode, the computer saves open documents and running applications to the hard disk instead of to RAM, which means it uses zero power. It takes a little longer to start back up from hibernation, though, so sleep mode may be better for shorter breaks.

Recommended: Do You Qualify for Home-Office Tax Deductions?

Choosing the Right Light

Making the most of natural light in the layout of a home office can cut down on eye strain and energy use, so it can help to create a workspace by a window.

But if a desk lamp will be on for much of the day, using energy-efficient bulbs instead of traditional incandescent bulbs could decrease the amount of energy the light will use by as much as 90%.

Because LED light bulbs produce less heat, they also may help cut costs associated with home cooling. And LEDs and compact fluorescent lamps typically last longer than traditional bulbs.

Elsewhere Around the House

Working from home typically means more time spent using appliances; opening and closing doors; and running the air conditioner, fans, or the heater.

Many power companies offer free home energy assessments with a custom report that shows a home’s past and current power use and offers tips on how to save energy in the future.

For those who prefer to DIY their audit, the Environmental Protection Agency provides the Home Energy Yardstick , which compares a household’s actual energy use (based on a year’s worth of utility bills) to that of similar households.

There are also companies that, for a fee, will come and inspect a home’s energy usage. They will also report on areas where the home and its residents could be more energy efficient (though it may require changing some old behaviors).

Making Chores More Efficient

If the local utility company offers “time of use” pricing plans — charging less for power consumed during off-peak hours — it might be another opportunity to save.

Taking advantage of lower pricing may require breaking some old habits — running the dishwasher in the morning, for example, or doing laundry in the late evening — but the reward might be a lower utility bill as well as a healthier planet.

Running full loads in the clothes washer, dryer, and dishwasher can be another way to save. Tempting as it may be to run a load just to get a favorite pair of jeans clean, you’re much better off waiting till you can fill the washer.

💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.

Adjusting the Thermostat

One of the easiest ways to be more energy efficient is to set the thermostat up or down a degree or two to keep a home’s heating or air conditioning from running constantly.

The DOE advises consumers to set the thermostat to 78 degrees — or as high as is comfortable — when home in the summer.

In the winter, the DOE advises consumers to set the thermostat to about 68 or 70 degrees when everyone is awake and to turn it down when they’re asleep or not at home.

For the summer, the DOE similarly recommends setting the temperature to as high as is comfortable when they’re home, but letting the house get warmer when they’re away from the house. (Using a smart thermostat that can be operated from a smartphone can make it easier to manage adjustments.)

Getting Creative When Cooking

If eating at home more often is giving the oven a workout (and heating up the house in the summer), consider using the microwave, slow-cooker, or toaster oven to save on electricity and keep things cooler.

So can using the charcoal or gas grill out on the deck, and that might lend a party atmosphere to your regular dinner.

Keeping the Fridge Filled

A well-stocked freezer operates more efficiently than one that’s sitting half-empty, so feel free to load it up (but look for ways to save money on groceries when doing so). And, of course, if you are buying a new fridge, look for an Energy Star one.

Showering Responsibly

According to the DOE, about 18% of the energy consumed in the average home is from heating water. That means long, hot showers, or even standing at the sink shaving with the water running, can drive up energy bills. So can using the hot water setting on the washing machine or rinsing dishes in hot running water.

One option is to turn down the temperature on the water heater. That will help cut your energy bill when you’re working at home without impacting your comfort much at all. Shortening those showers (which can also help you save on water bills) and changing other habits, regardless of whether you are working from your kitchen table or an office, also can help conserve energy and save money. Extra points awarded to those who air-dry their hair or use the same bath towel more than once.

The Takeaway

Whether this is a temporary situation or working from home becomes a regular thing, you may find you’ll have to rethink your budget to accommodate the changes to your lifestyle. While typically your energy bill may go up when you are spending more time at home (and at your laptop and perhaps peeking in the fridge), it’s possible, with a little effort, to manage your power costs.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Does working from home increase your electricity bill?

Working from home can increase your electricity bill due to the extended use of devices such as computers and monitors, an increase in space heating or cooling, keeping lights on for longer periods, and using appliances more frequently. This increased activity leads to higher energy consumption, especially if energy-efficient practices are not followed.

What runs your electric bill up the most?

While home energy use and costs can vary significantly depending on region, home size, and the energy source, the most significant contributors to a high electric bill are typically heating and cooling systems, followed by water heating, lighting, and the use of other appliances and electronic devices. Running these systems and devices for extended periods, especially during peak hours, can significantly drive up energy costs.

How can I cut down on electricity usage?

To cut down on electricity usage, adjust your thermostat by a degree or two, maximize natural light and switch to energy-efficient bulbs, and use smaller appliances when possible, such as a microwave or toaster oven instead of the oven. In the home office, consider choosing a laptop over a desktop, using the computer’s sleep or hibernate mode, and unplugging devices when not in use.

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOBNK-Q225-007

Panic selling is when a large number of investors want to sell their holdings at the same time, and it creates a drop in prices. That drop scares other investors into selling, which causes prices to fall still further, which frightens more investors, and so on. The resulting panic can erase vast amounts of wealth. It can take weeks or even years for the markets to recover from a serious panic-selling event.

The popular advice on panic selling for most investors is simple: Don’t panic. The logic being that over time, and through major financial crises, the equity markets have tended to rebound and rise. Investors may also take steps to minimize their exposure to panic selling, however, such as by routinely reviewing and adjusting their holdings in view of their investment horizon and risk tolerance.

Panic Selling and Stock Market Crashes

Stock markets — and the market for anything from housing to basic commodities — go down when there are more people selling than buying. And sometimes in the stock markets, the sellers outnumber the buyers to such a degree that sellers panic and are willing to take almost any price to get cash for their investment.

When panic grips enough investors, the markets can crash. Panic occasionally sets in. Sometimes it’s a major global event that sets it off, like what happened with the stock markets in March of 2020 as the global COVID-19 pandemic picked up speed.

Other times, it’s a matter of a given asset — like housing and real estate in 2008 — being bid up to unrealistic levels, followed by the mass consensus of what it’s worth changing seemingly overnight. The history of U.S. recessions is full of emotionally charged market changes.

What Causes Panic Selling?

While panic is a very human response to the prospect of major financial loss, there are also other factors that can trigger investors to start panic-selling stocks, including: margin calls, stop-loss orders, and algorithms.

Panic Selling and Margin Calls

In the Great Crash of 1929, there were many investors who had borrowed heavily to invest in the stock market. When the markets dropped, they received something known as a margin call, requiring that they pay back the loans they took out to invest.

Those margin calls required that they sell potentially even more stock to pay back the loans, which caused the markets to fall even further.

Panic Selling and Stop-loss Orders

Similarly, there are trading programs that can throw fuel on the fire of a bout of panic selling. These can be as simple as a stop-loss order, a standing order to buy or sell a particular security if it ever reaches a predetermined price, which investors commonly use in their brokerage accounts.

A stop-loss order can be a way to take advantage of price dips to buy a stock at a discount. But during a sudden drop in the markets, stop-loss orders often lead to automatic sales of stocks, as investors try to lock in their gains.

These automatic sales — in large enough numbers, can accelerate the decline in a market, and contribute to the panic.

Panic Selling and Algorithms

There are algorithms employed by major financial institutions and professional investors that will automatically sell if the price of a given stock falls to a certain level. The crash of 1987 was caused in part by some of the first computerized trading programs.

And in 2010, one trader who lost control of his highly sophisticated trading software was responsible for the “flash crash,” which caused roughly a trillion dollars of market capitalization to disappear in under an hour.

The system-wide risk presented by these tools is one reason that most major stock exchanges have installed a series of trading curbs and “circuit breakers” in place to slow down panic selling, and give the traders who use these programs a chance to recalibrate them before a full-fledged selling spree can run out of control.

The Risks of Panic Selling

When markets drop suddenly, it can be scary for investors. And one of the biggest risks may be to give into that fear, and join in the selling.

But one thing to remember is that markets go up and down, but an investor only loses money when they sell their holdings. By pulling their money out of the stock market, an investor not only accepts a lower price, but also removes the chance of participating in any rebound.

Loss is a big risk of panic selling. People who invest for goals that are years or decades away can likely weather a panic. But if a person is investing for retirement, a sudden panic just before they retire can create a major problem, especially if they were planning to live off those investments.

The danger of sudden, panic-driven drops in the market is one reason it makes sense for investors to review their holdings on a regular basis, and adjust their holdings away from riskier assets like stocks, toward steadier assets like bonds, as they get nearer to retirement.

That risk is also why most professionals recommend people keep 6-12 months of expenses in cash, in case of an emergency. That way, even if a financial crisis causes a person to lose their job, they can stay in the market. It’s a way to protect their long-term plans from being jeopardized by everyday expenses.

Finding Opportunities in Panic Selling

During a panic, there are typically enough scared people making irrational decisions to create valuable buying opportunities. The stock-market crashes in 1987 and in 2008, for instance, were each followed by a decade in which the S&P 500 rewarded investors with double-digit annual returns. (As always, however, past performance is no guarantee of future success.)

The problem is that there’s no way to know when a panic has reached its end, and when the market has fallen to its bottom. Professional traders with complex mathematical models have had mixed results figuring out when a market will rebound. But for most investors — even savvy ones — it’s a guessing game at best.

There are two ways an investor can try to take advantage of a bout of panic selling:

1.    The first is not to panic.

2.    The other is to keep investing when the market is down, while stocks are selling for much lower prices.

Dollar Cost Averaging

One way to take advantage of panic selling is with dollar cost averaging. With this long-term plan, an investor buys a fixed dollar amount of an investment on a regular basis — say, every month. It allows an investor to take advantage of lower purchase prices and limits the amount they invest at when valuations are higher.

As such, it’s a strategy for all seasons — not just during a panic. Most investors already employ some form of dollar-cost averaging in their 401(k) plans.

The Takeaway

Steep drops in the stock market are usually headline news. The causes aren’t always clear or easy to understand. So it makes sense that a sudden drop in the markets can cause even seasoned investors to make mistakes. This is a real risk. But it can also create opportunities.

That’s why it’s important for investors to revisit their financial plan regularly, to make sure they can weather the storm, and still be on track to reach their goals — even if a market decline means they have to take a few steps back.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).