A personal financial crisis can come from many things. A lost job, a divorce, bankruptcy, a sudden medical emergency. Or any situation in which your financial security crumbles beneath you. Regardless of the cause, the consequences are often similar. Emotional stress, confusion, perceived loss of control, and loss of confidence.
That’s why having a financial plan in place will help you best prepare for any financial crunch.
Too many people feel the need to fake appearances, to appear ‘normal’. Social media makes us feel like we are not enough if we are not posting pictures of family holidays, new cars or parties. In reality, so many people are facing a personal financial crisis but why are we afraid or ashamed to talk about it or to seek help.
How to avoid a Financial Crisis
A financial crisis can be triggered by factors outside of your control. You might become ill or have an accident, preventing you from working. You might find it hard to get a good paying job or you may get laid off.
But one of the biggest causes of financial problems is living beyond your means. For the most part, this is a cause that is within your control. One of the best ways to avoid a financial crisis is to plan to live below your means. Living ‘on the edge’ is a recipe for disaster.
Create a Plan
If you aren’t keeping a budget, you also have no idea whether you’re currently living below your means or overextending yourself. It’s time to prepare a household budget. List all your monthly expenses. Next, start to cut non-essential items. Things like entertainment, gym memberships. You want to calculate how much you need to cover the necessities only.
In the event of a loss of income, how would you meet this number? Brainstorm ideas on ways you could create income.
Build up Savings
The next step is to start a savings plan that will help cover your monthly living expenses.
Pay yourself first each month by putting around 10% of your salary into an account that you don’t touch. If you’re tempted to use this money when you’re a bit short, choose a different bank than you usually use. As soon as you receive your pay, transfer the money into this account and then forget that you have it there. You will be surprised at how soon the balance can add up.
You should have enough money in this account to pay for all your basic living expenses for a three to six months. This will ensure you have the funds to continue business as usual while you work to find more income.
Pay off Debts
Credit card debt is one of the major causes of financial difficulty when times get tough. If possible, pay the balance on your
accounts in full at the end of the month. While it may sound nice, this is not a reality for most people. But it’s imperative to cut these to protect yourself in times of financial crisis.
Take a look at the outstanding balances of the credit cards that you have. Start with the one that has the lowest balance and pay a higher amount than the minimum payment each month. Once paid in full, use the payment and add it to the payment for the next-lowest outstanding balance. This is where you will see the balance coming down much faster. It may take some time to complete, but the rewards are well worth the effort.
When faced with a difficult situation, people often try to deny or ignore the situation. While it may feel better to do this, it does not help in the long run. Accepting your situation can empower you to face your difficulties head-on. Instead of dwelling or blaming yourself, make a commitment to solve the situation.
Life is unpredictable. But with the right preparation, you can prevent a a setback turning into a financial crisis.