8 Steps to Prepare for a Personal Financial Crisis
A money crisis can occur in the blink of an eye – and most aren’t predictable. COVID-19 is a perfect example of an unforeseen circumstance that caused massive personal finance issues for millions of Americans who suddenly found themselves out of work. With uncertainty still hanging in the air, it’s never been more important to prepare for a personal financial crisis today.
How You Can Prepare for a Personal Finance Crisis
Pre-COVID-19 data found that about 40% of US households didn’t have enough cash on hand to cover a $400 unexpected expense.
These individuals stated that they would need to put the expense on a credit card, borrow the money from family or friends, or sell something they owned. A smaller percentage in this group said they would have to get a bank loan, use a payday loan, or get a deposit advance. However, 12% of the people in this group said they would not be able to pay for the expense by any means.
Below are 8 simple tips to avoid a personal financial crisis and provide more financial security:
1. Know What Money Is Coming in and Going out
The first step to money management is to take a money inventory. Ensure that you know:
Where your money is including the account numbers and passwords
How much money you spend each month (if you don’t know, then track your spending).
How much money you owe and what the minimum payments on your debts are
How much money you have saved and how much of it is liquid
Lastly, in the event of an emergency, you should know how to quickly gain access to your cash or assets. If you’ve forgotten any information for account access, now is the time to contact the appropriate financial institution to work out any kinks. This way, if an emergency hits you, you’ll feel much better prepared.
2. Cut Unnecessary Expenses
After you figure out where you’re spending money, start looking for ways to cut expenses. By doing this, you’ll be able to save that money for emergencies. While it’s a common suggestion to cut out your weekday coffee, this isn’t going to make your savings rate skyrocket. Instead, consider the following to start cutting expenses:
Purchase generic brands when possible (including prescription drugs)
Cut your cable (we all have Netflix anyways)
Cancel any subscriptions you don’t use
Consider whether you need a gym membership or can find ways to exercise for free
3. Negotiate Your Bills
Another great way to lower your expenses is by negotiating how much you’re paying for various services. For example, if you don’t think you can completely eliminate your cable, call the provider and tell them you may cancel your service if they can’t lower your bill. Companies almost always have introductory deals for new customers. Since many of them don’t want to lose existing business, they may offer you a cheaper package.
You can use this same strategy and call:
Your credit card company to ask for a lower interest rate
Your insurance company to inquire about additional discounts
Your cell phone provider for a lower monthly payment (or additional perks)
Companies are often willing to negotiate with you because consumers can choose a new business to give their money to.
4. Work to Pay off Debt
Debt can pile up quickly, especially high-interest debt like credit cards. According to the Federal Trade Commission, if you charge $1,500 on a credit card with a 19% interest rate and pay the minimum amount due each month, you’ll end up making 106 payments. The worst part is you’ll have paid $889 in interest. That’s money that could have been a buffer for a personal financial crisis.
Create a debt payoff plan for things like credit card balances, student loans, personal loans, and auto loans so you can get that money back in your own pocket. Start by paying off the high-interest debt (most likely credit card debt) first. While you pay off one debt, don’t forget to make the minimum payments on ALL debts to protect your credit and keep your accounts in good standing.
5. Automate Savings
It’s hard to prioritize savings, but we all know it’s a necessity to prepare for a personal financial crisis. The easiest way to make sure you save money every month is to automate it. For example, if you get paid on the 1st of every month, you could request a recurring transfer from your checking to a savings account on the 4th of every month. Note: Make sure this transfer amount is in your budget so you don’t overdraft the account.
You’re going to be tempted to dip into your savings, but you should really stay out of it unless a money crisis hits. To create obstacles for withdrawals, keep your savings at a different bank or credit union. We suggest you look into a high yield savings account or a money market account (MMA) as a place to keep your emergency fund. Both of these accounts offer a higher interest rate than standard savings accounts at your bank.
Wherever you choose to keep your savings, leave the money alone unless you’re in a personal finance crisis.
6. Sell Unwanted Items
Saving and spending is important for money management, but so is earning money. One way to earn money – without too much effort – is to sell unwanted items. You probably have items in your home that you no longer use or even like. To earn cash while getting rid of your clutter, sell them:
At a yard sale (after the COVID restrictions are lifted in your state)
On an app like OfferUp, Decluttr, or Letgo
Online on Amazon, Craigslist or Etsy
7. Increase Your Income
One way to increase your savings is by increasing your income. Here are just a few ideas:
Help people with their taxes if you’re a professional CFA or CPA
Cut lawns or landscape
Pet sit or dog walk
Almost everyone has some type of marketable skill that can provide extra money. You just need to figure out yours.
You don’t necessarily need to increase your income outside of your job. Try to increase your income at work by:
Asking for a raise
Looking to move up within your company
8. Increase Your Credit Score
During a personal financial crisis, your life may be disrupted in many ways. You may need to take out a loan or even move to another location. Lenders and landlords will want to know your payment history before extending credit or entering into a lease agreement. If you can demonstrate a history of paying your bills on time (and limiting your debt level), you’ve got a better chance for an approved loan or lease.
Manage Your Money Now to Be Prepared for a Money Crisis
While no one can predict a personal financial catastrophe, preparation can lessen its impact and reduce the stress and uncertainty. Prepare for the planned and unexpected expenses by saving and managing your debt and income. The next time a money crisis hits, you’ll be able to breathe a little easier.
Ask the Experts Your Personal Finance Crisis Questions
InvestingAnswers is on a mission to help consumers build and protect their wealth through education. That’s why we have experts answering your pertinent financial questions at the end of every article.
Q: How Can I Overcome This Money Crisis?
Prioritize your essential expenses and take it one step at a time. This often means that food, shelter and transportation are your first financial priorities. However, this may entail making cuts even within those categories. Instead of restaurants, consider using the local food bank. While a car is necessary for many, you could reduce monthly payments by driving something more within your means or, if possible, eliminate your car payments.
If this crisis is the result of a job loss or reduced pay, seek out any financial assistance programs available to you, including filing for unemployment (if eligible).
Non-discretionary expenses are those which are usually on autopay and you usually do not have the option to forego paying. However, in certain situations, even these are negotiable. For example, call your student loan servicer, credit card company, and any other financial institutions you owe money to and ask for a deferment or forbearance. During the Covid19 pandemic, many of these were granted for months without detriment to your credit score.
Q: How Do I Get Out of Financial Ruin?
The time to prepare for a financial emergency is yesterday, both by building up an emergency fund and attempting to minimize debt. If you are already in a personal financial crisis, you need to take drastic action immediately. The steps above offer several good suggestions to start with. .
If you’re facing debt collectors – or feel extreme anxiety about your money – then perhaps it’s time to bring in a professional such as a debt collection attorney who can help negotiate with your creditors. If the debt is manageable, then consolidating debt (hopefully at a lower overall interest rate) will help simplify the process. Some financial experts recommend paying off your smallest debts first to help improve your cash flow and to start making measurable progress. Another approach is to sort your loans by the interest rate, and to start paying off the highest first (normally credit card) as those are accruing interest and hurt you the most in the long run. Depending on your situation a combination of the two approaches might make sense.
If you are truly facing financial problems that you cannot overcome, then carefully consider the implications of filing for bankruptcy - especially which types of debts you can and cannot lose and how long it takes to recover from this legal action. Bankruptcy is truly a last resort.