PANIC MODE! Why It’s Dangerous and How to Avoid It

In 2006, I realized that I couldn’t pay my bills any more. I did the math and I realized that we just didn’t have the cash to go around. Sure, I did the smart thing and started reading and planning, but I also panicked a bit. I dove into cleaning out my closet and selling things off. I threw several credit cards into a lock box. I cancelled a bunch of subscriptions. I did this all in an emotional rush. We’ll see how that panic paid off later.

In 2008, I watched as several good friends and family members slowly – and then suddenly – became panicked as Wall Street laid an egg. At least one family member watched their retirement fund literally lose half of its value in the last several months of 2008. Some of them panicked. One in particular began to follow the daily and even hourly ups and downs of his retirement investments and wound up making some big changes to his savings – and we’ll see how that panic paid off later.

A few years ago, I watched a close friend fall in love and abruptly move across the country. It was an abrupt move, one done in a panic-like surge of emotion. She quit her job, packed up her bags, collected the relatively small amount of cash she could put together in just a few days, and departed. She moved clear across the country with only the vaguest lead on a job and a deep sense of love and romance. Within a month, the relationship fell apart. We’ll see how this panic ended up in a bit.

Not very long ago, another friend was working at a relatively low-paying job and he was definitely living in a paycheck-to-paycheck fashion. He woke up one morning and found that his car wouldn’t start and he didn’t live in a place where mass transit was really an option. Within a few hours, he was selling piles of his stuff on Facebook. How did that panic turn out? We’ll find out later.

Another close friend sold her house in anticipation of getting married. A few days before she moved out of her house, she got into a major fight with the man she was supposed to marry and they chose to call off the wedding. In a panic, she bought a different house from those that were on the market in her area. How did that move turn out? Again, we’ll find out later.

What do all of these stories have in common? They’re all about people leaping into “panic mode” as the result of an unexpected event in their life. Their emotional response to an unexpected situation caused them to begin making poorly-planned decisions. Unsurprisingly, at least some of these stories ended up with less-than-stellar results.

In short, “panic mode” is almost always a bad state to find yourself in. When you’re making major life choices and financial decisions in a short timeframe and under emotional duress, the outcomes aren’t always going to be what you want.

So, how do you avoid panic mode? What are some strategies for handling it if you find yourself in a finance-related panic? Let’s dig in.

Five Strategies for Avoiding Panic Mode

Here are five things you can do right now to avoid panic mode in the future. These tactics either reduce the strain of a major unexpected event or else help you now with the decisions you might choose to make during a future panic.

Build an Emergency Fund

This is the most important thing you can do. An emergency fund is simply an amount of cash that you have sitting in an easily-accessible savings account so you can grab it when the chips are down. An emergency fund can buy you a plane ticket, pay for a car repair, or anything else that might come up — without tapping your credit cards. This is important, because you may need that emergency fund at a time when you’re dealing with identity theft or a difficulty with your credit card issuer.

The time to get started on building an emergency fund is right now. Just direct your bank to start moving a small amount each week or a larger amount each month into your savings account automatically so that you don’t even have to think about it. That way, when an emergency happens – a car fails, a relative dies, you lose a job, etc. – you have that cash available to you.

How much of an emergency fund should you have? I don’t think the total amount is that important, though I do encourage people to add extra funds when they can if they have less than $1,000. What’s important is that you simply contribute a small amount each week and each month and let it grow in perpetuity. You can always decide when you have “enough” down the road.

Maintain Your Stuff, Your Job, Your Health, and Your Relationships

It’s easy to not keep your house clean, to let your car fall into disrepair, to let your health slack, to not worry about the relationships in your life, to slack off at work, and so on. All of those things will keep running for a while out of sheer inertia, but eventually they’ll fail.

Maintain your health by eating healthier foods, exercising a little, and getting adequate sleep. Maintain your job by keeping up your skills, finding useful things to do during downtime, and paying attention to your performance reviews. Maintain your possessions by following maintenance schedules, keeping them clean, and taking care of problems as soon as they’re noticed. Maintain your relationships by listening to the other people, keeping in touch with them, and helping them out when you can.

Without maintenance, those things will fail you, often when you need them most. Maintain what you have today so that it will work for you tomorrow.

Think Ahead About How to Handle Unfortunate (and Fortunate) Events

What would you do if you woke up tomorrow morning and your car didn’t start? How would you handle things if your spouse passed away in the night? What if that happened to your mother, or your child? What if you lost your job tomorrow? Do you know what you would do? Do you have a plan in place, at least in some vague sense?

Thinking through scenarios like these can be a painful activity, but the act of actually considering these kinds of things can help you formulate an understanding in your head of how you would respond to them. Those kinds of exercises can also help you to figure out things you can do right now to soften the blow of those kinds of unexpected events, like purchasing term life insurance or having your car looked at when it first starts showing signs of trouble.

This doesn’t mean that you need to spend time dwelling on disasters and feeling depressed. What it does mean is that you should spend some of your spare time thinking through these scenarios and how you would handle them. Spend a commute thinking through how you would handle a job loss and what you can do to make that response less painful. Then, in a few days, spend a commute thinking about how you would handle things if your car broke down the next morning.

Build a Diversity of Personal Skills

I really like to use a quote from Robert Heinlein to illustrate this point:

“A human being should be able to change a diaper, plan an invasion, butcher a hog, conn a ship, design a building, write a sonnet, balance accounts, build a wall, set a bone, comfort the dying, take orders, give orders, cooperate, act alone, solve equations, analyze a new problem, pitch manure, program a computer, cook a tasty meal, fight efficiently, die gallantly. Specialization is for insects.” ― Robert A. Heinlein

Think of the person that Heinlein describes in that quote. What exactly is there in life that such a person could not handle effectively and without panic? Panic often comes from being aware that you do not have the skills or resources to handle a situation, and a person with a widely varied skill set will usually have the skills and will have the ability to get the resources in short order.

In other words, one incredibly effective way to protect yourself against future panic is to simply build a wide and varied set of skills. You should know how to do things like change your car’s oil, fix a broken toilet, fix a damaged computer, prepare a delicious meal from whatever’s on hand. The more skills you have like that, the better off you’ll be at handling whatever crazy things life throws at you. The more you rely on others, the harder it becomes to deal with crisis yourself.


This might seem like a crazy solution, but bear with me. For starters, volunteerism has taught me that no matter how bad my situation might seem, it’s really not that bad. So many people have it far worse than I do. Whatever I might have to face is a pretty small deal compared to a child that’s not getting enough to eat and not getting any attention from their parents, or from a person who is struggling to overcome a major disability, or a person who is struggling to overcome a mistake in their past.

Another big reason to volunteer is that it teaches patience and calmness. If you volunteer and interact with people, you’re going to come up against challenging situations, ones that press you in a deeply personal way. Learning how to handle those painful outcomes not only makes you a better volunteer, but builds you into a person that’s much better equipped to handle unexpected events.

Five Tactics for Handling Panic Mode Once It Occurs

Sure, those other strategies are useful for preparing for an emergency situation in advance, but what do you do when it arrives, especially if you’re not perfectly equipped for it?

Take No Actions at First

It is often very tempting to respond immediately to an emergency situation with the first action that comes to mind – and sometimes that is the right move. Most of the time, though, it’s not the right move, and doing that will make things even worse.

The best thing you can do in most panic situations is stop for a moment. Catch your breath. Calm yourself down. Then, start thinking about rational options. The rest of this list is composed of methods for generating those rational options and figuring out how to move forward.

Making a big move while riding an emotional wave is almost always a giant mistake. Unless you absolutely have to act right now, don’t. Wait for a while and let your calm mind take the reins again.

Talk With People You Trust – and Reveal Everything

Whenever you’re in a panic mode, you should never fully trust your own judgment. You’re often riding high on an emotional wave and, even more than that, you’re often seeing things only from one specific perspective. A fresh set of eyes and ears, especially from a source that isn’t emotionally distraught, can offer some real insights.

So, before you make a move, call a person you trust. Lay out the whole situation – nothing hidden, no lies – and ask for their advice. It’s very likely that they’ll see something that you do not and offer an avenue that you’re not even considering in your emotional state.

Complete honesty is vital here. If you’re withholding key pieces of information because you’re worried about privacy or you’re worried about what they’ll think, you’re seriously damaging the quality of any advice they might give you. If it’s relevant, tell that person the truth.

Make a Thorough List of Options

As you calm down and think about your options – and consider the options that your trusted friend has suggested – you should make a list of those options, even if it’s just a mental list. Try hard to brainstorm lots of possible things that you could do to handle this situation. For me, making a physical list in my pocket notebook really helps me to get my thoughts in order in situations like this.

If you’re not pushed up against a time limit, spend some time doing a bit of research. Hit Google and collect every sensible suggestion you can find and jot them down. Generating lots of ideas and solutions will help you come up with a solution that really works for whatever your problem happens to be.

List the Pros and Cons of Each Option

Each of those options that you generate is going to have some benefits and some drawbacks. Some of them might require more time than you might have, for example, or some might require more money than you currently have. On the other hand, each of those options likely has some benefits – it either solves the problem, delays it, or reduces some of the negative impact.

Once you start considering the pros and cons of each option, some of the best options will quickly emerge. Sometimes, the best option is obvious – at other times, you’re stuck between a handful of options.

My usual approach is to choose the option that puts me in the best long-term position, even if it means the short term is a bit harder. I find that a short-term challenge is usually something I’m willing and able to overcome, but a long-term bad outcome is something that I’ll really regret.

Get Input from Those Trusted People on Your Pros and Cons

Before you start taking action, though, check in with your trusted people again. Let them know the solution you decided upon and why and see if they offer any additional input that might be useful. If you’re not sure which of a few options is best for you, present those options and ask for their input.

It’s worth noting here that it can be a very good idea to have multiple trusted sources to talk over your decision with. You don’t necessarily have to rely on just one person. The more advice you have from a source you trust, the better.

What About Those Five Stories?

So, what about those five “PANIC MODE!” stories at the start of this article? What happened in those cases?

In the first story, where I was dealing with a financial meltdown in 2006, I panicked by selling off several of my collections. Looking back, I don’t miss most of the things that I sold, but if I had done things in a more rational state of mind, there are at least a few items I would hold onto.

In the second story, where I watched a friend completely panic because their retirement account had lost about half of its value in 2008, that friend moved all of their money into bonds and money market funds. Since then, their account has recovered about half of what it lost. However, if that person had left everything as it was, they would have recovered everything and more.

In the third story, where my friend moved across the country for love, the relationship ended and she eventually moved back to where her family lived. She wound up in a much smaller apartment and moved on with life, though her finances were fairly depleted. Over time, her love life recovered, but the damage to her finances lasted a while.

In the fourth story, where my friend sold off a bunch of his stuff on Facebook to pay for an emergency car repair, my friend wound up getting their car fixed but regretted selling some of the stuff. One wonderful friend, who bought most of the stuff he was selling, sold it all back to him at cost, but that isn’t always going to happen.

In the final story, where a friend bought a house in a moment of panic, my friend wound up in a big house that she likes, but now she’s facing a house payment again and the house is seemingly too big for her needs. I can’t help but wonder if she’s not going to downsize in the next few years, and the money she spent on closing costs and moving expenses and countless other things will have just vanished into thin air.

Final Thoughts

Panic mode happens at some point to almost everyone. A situation occurs that you didn’t expect and it offers some intense challenges that you’re not quite prepared for. It causes an emotional surge and you panic. It happens.

What matters, though, is what happens next. Are you going to make some irrational moves here? Or are you going to step back, take a breather, and figure out a better plan of attack?

When the moment of panic has passed, what are you going to do next? Are you going to make decisions and take action in your life to reduce the chances of another panic moment? Or are you just going to cross your fingers and hope for the best outcome?

One path leads to security and good outcomes. The other likely leads to a big mess.

The choice is up to you.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.