You never know what’s around the corner that is as true in the financial sense as it is in any other arena of life’s journey. Although good financial planning is the best way to prevent a personal financial crisis, not everything can be foreseen and it’s entirely possible that you will find yourself with a situation to manage. The key is to remain calm, don’t panic. Easier said than done, perhaps but the only way out is with a cool head. Use the following hints and tips to guide your approach to dealing.
This first step is the same as when drawing up a personal financial plan:
- Itemize your cash flow (income and expenses) and your net worth (assets and liabilities). This is essential because effectively what you need to do is redraw your plan in light of the ‘crisis’. So, what money do you have: income, cash, investments, savings, etc? What regular outgoings are you responsible for? If the outgoings exceed the income and assets, prioritize them so that the most important (food and shelter needs) are paid first.
- Cut your expenses. Ask yourself how necessary each one is and be especially critical of ‘lifestyle’ expenses such as subscriptions and non-essential services. Stop eating out. When you have to make a purchase, look in the sales. Save energy and water to minimize utility bills. If you have an emergency fund then use it but as sparingly as possible.
- Maintain debt levels. Whatever the temptation, do not increase your levels of debt with non-essential spending. Leave the credit card at home. Likewise your ATM card. If you don’t do so already, start paying for everything in cash, it’s transformative how when actual currency is leaving your pocket it focuses your mind on each individual expenditure and forces you to question it.
- Approach your creditors, don’t avoid them. Especially if you’re going to miss a payment. Talk to them about your financial situation and your plans for extricating yourself. Agree reasonable measures and then stick to them.
- Ask yourself if there’s anything you can sell. Don’t be quick to sell your home, the short-term expense of moving, commissions and taxes can leave you much worse off than just keeping up with the regular payments. But do consider your other assets. A second car may suddenly seem much less necessary. Similarly, attics and garages may be full of nice-to-haves that can be sold via Craigslist, eBay or similar.
- Assuming you have a job or a business, focus on it strongly. Now is not the time to become distracted from your main source of income. In fact, this is the time to make yourself even more indispensable to an employer or work round the clock to win new clients or make extra sales.
- Additional income. Look for methods of earning extra money either to make up an income/expense shortfall or simply to pay off liabilities quicker. Ask yourself what skills (and time) do you have that are underutilized at the moment?
- Short term help. If you’re really up against it, there are a number of temporary measures that you may be in a position to take:
- Borrow from your life insurance.
- Borrow from a college fund.
- Stop paying in to your retirement plan(s).
- Avoid bankruptcy at all costs.
Although it takes care of your debts, there is undeniably a stigma attached and it has all kinds of long-term impacts for years to come on employment, housing, and funding your own business.
Finally, ask friends and family for help. This may be a time to rely on your network. Not necessarily for financial contributions but for practical help (such as minding the children while you’re working) that can give you some breathing room while you get back on your financial feet.