How to Deal With a Financial Crisis
Posted on November 11th, 2010
Financial emergencies can strike at any time, and unfortunately, they usually come with little to no warning. Job loss, vehicle or home repairs, medical expenses and other major events can quickly consume your emergency fund and leave you looking for a way to get by. But you don’t have to panic. Here are some tips for dealing with a financial crisis, starting with preparation:
Prepare Before Disaster Strikes
The first thing you should do is set up an emergency fund. The size of your emergency fund should be, at minimum, large enough to cover major car repairs, and on the high end, enough to cover several months of living expenses. Many financial experts recommend 6 months worth of living expenses. It can take a long time to save that much, so start small and work your way up to a larger emergency fund.
When Disaster Strikes
You never know if and when a disaster will happen, and more importantly, you won’t know the severity. Here are some tips to help you cope:
Dont panic. Take a moment to fully assess the situation. Actions taken under distress can compound the problem.
Adjust your budget. Take a long look at your budget and look for areas where you can reduce expenses. Keep in mind many of these changes can be temporary in nature and dont have to be permanent. Say goodbye to things like magazine subscriptions, premium cable channels and other luxuries. Instead, check out the local library or use free cable TV alternatives.
Do Not Increase Your Debt. It’s tempting to rely on credit cards if your income isn’t enough to pay your necessary expenses. Don’t do it! Using credit cards when you don’t have the money to pay for them or your other expenses is only adding to your financial problems and making them worse.
Call Your Creditors. People who are struggling to pay their expenses often avoid their creditors. Instead of trying to avoid their phone calls, take the initiative and call your creditors before they call you!
Call each one to explain your financial situation and let them know how much money you have and how many creditors are being paid from it each month. They may be able to help you with a temporary payment plan, during which time your interest rate is dropped and your monthly payment is lower. Whatever payment arrangements you work out with your creditors, make sure it’s realistic under your current financial situation (you can pay it) and then keep the promise.
Talk to Your Mortgage Company. If you have a mortgage, call them about mortgage assistance before putting your house up for sale. Sometimes a lender can help you with a modified payment plan temporarily, or can extend the term of your loan to permanently lower your monthly payment.
Sell What You Don’t Need. Most everyone has collected items they “had to have” over the years, only to have them sit in a closet or on a shelf with little use. Look through your house for anything you have that you don’t need, or no longer even care about.
Electronics, bicycles, video games and books can often sell quickly if you price them reasonably and get the word out. Use eBay or other auction sites, or your local classified listings if they’re inexpensive to list items for sale. Use the proceeds from the sales to reduce debts or pay living expenses.
Temporarily Reduce Retirement Contributions. If you are contributing to a retirement account, you may be able to temporarily reduce or stop making contributions to keep more of your income to pay expenses. It is not advisable to use your retirement funds, or take a 401(k) loan due to the many associated pitfalls (potential penalties, fees and other tax implications), but if the amount of your contributions would make a difference to your income, it’s beneficial to reduce or stop contributing long enough to get back on your feet.
These are just a few tips. The reality is that each situation is different and you may have other ways of reducing expenses or generating income. The key here is to be proactive and methodically work through the situation.
Ryan Guina is an entrepreneur and writer. He has worked for Fortune 500 companies and served six years in the USAF. He writes about money management and small business topics at Cash Money Life and military money topics at The Military Wallet. You can follow his twitter feed.
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Tags: Financial, Financial Crisis
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