8 Steps To Help You Prepare For A Personal Financial Crisis
- July 27, 2020
- 7 min read
- 64 reads
If 2020 has taught us anything, it is that our ‘normal’ can change overnight. One day everything seems as it should, the bills are being paid, the investments are slowly rising, and we are, to some degree, satisfied with our own normal.
But what if our normal was gone? Are we prepared for negative setbacks due to economic crisis, job loss, a car accident, or an unexpected illness? Financial setbacks can cause a great deal of stress if we are not prepared for them.
Studies suggest that the average American is not handling money well. The majority are not prepared for financial setbacks such as a job loss, which would cause a personal financial crisis.
Here are 8 steps you can apply to help deal with an economic crisis.
1. Conduct a Personal Net Worth Stock Take
Knowing how much you have on hand is an excellent place to start. Take count of all your non-cash and cash assets.
Any cash accounts or investments that are easily liquid will be your initial saviors in a financial crisis. They can be readily converted into cash without the effects of the market conditions in an economic crisis.
Long term asset prices such as stocks and ETF’s are volatile during a crisis. They are best left in place as long as possible to avoid a more significant financial loss.
2. Set a Budget
Thriving Wallet conducted a 2020 research study on over 3000 Americans. They found that money is the number 1 stressor in the U.S. Having a budget and sticking to it allows you to visually see where your money is going.
Personal financial crises can cause you to feel no longer in control of your situation. A budget helps clarify your financial position and regains some of that control over your finances.
90% of individuals in the Thriving Wallet study say that money impacts their stress levels. What was even more eye-opening was that 50% of the individuals admitted feeling unable to control important financial aspects of their lives.
As simple as it sounds, a budget is an initial step to reclaiming personal financial confidence.
A budget shines a light into areas of habitual spending that is holding you back from a safer financial future. It’s a clear truth of where you are financially and lets you know where you need to make cutbacks.
3. Break your Outgoings Up Into Needs And Wants
Break down the outgoings in your budget into two categories Needs and Wants. Doing this prior to a crisis allows you to make a non-emotional decision before about what is important to you and what you are willing to cut back on if a financial crisis ever occurs.
Here is a example of my outgoing categories.
Hair and Makeup Expenses (Trust me)
Once you have broken your budget into two, you can identify how much money you will need to have easily accessible in times of personal financial crisis.
If you see areas of your budget that you are willing to cut, now do it! Every dollar will get you closer to finding financial peace.
How can we overcome the economic crisis? Having an emergency fund set aside that will cover 3 – 6 months of expenses will reduce your number one stressor.
4. Reduce Your Expenses
Now that you have a budget, begin going through your bills and accounts to see if you can identify any areas that are not necessary. Are you paying high fees on accounts that could be changed?
Have you negotiated your insurance lately? Or does your phone plan need updating to a cheaper plan?
Credit card fees
High interest small personal loans
Phone bills / Landline / Cell
Reduce Your Expenses
5. Pay Off High-Interest Debt
Hopefully, you have identified a few areas where you can begin to save money immediately. If you are not currently in a financial crisis, consider paying down any high interest small personal loans and credit cards, with the extra money you’ve saved.
The logic behind paying down your high-interest debt before placing extra money in savings is that the exorbitant fees associated with the loans are much higher than the interest you will obtain from a savings account or any money market investment.
Paying off high-interest personal loans should be your priority, as late payments during an economic crisis can damage your credit score.
If you have high interest small personal loans or credit cards, consider consolidating them into one loan with a lower rate. Once paid off, you should have lower outgoings, which will mean you will have to save less to get through a personal financial crisis.
Once your small high-interest debt is paid off or consolidated into a lower interest loan, then begin saving towards an emergency fund.
6. Spring Clean and Sell Everything You Don’t Use
Make a list of everything you don’t need or use and sell it. When should you get rid of an item? If you have not used something in over six months, its time to let it go.
Obviously, this is not a hard and fast rule, and if there is something has a high sentimental value and low saleable value, then keep it. But as Marie Kondo says, “ask yourself, does this bring me joy? If not, it’s time to let it go.
You will be surprised at what goodies you have stored in your house that can be sold that do not improve your life at all. Let someone else enjoy them, and you get to enjoy being closer to your financial savings goal.
6. Hold Yourself Accountable
In our household, we have a fortnightly quickfire ‘date’ to discuss finances. We go through our bank statements together and hold each other accountable for our spending. We reiterate the goal and keep our focus on the pros and cons of the last few weeks and where we want to be in the next two weeks.
Often in households, there is one who is better with money than the other. When discussing finances, both parties need to be aware of the stress level that comes with the “finance” conversation.
The conversation needs to be open and unguarded, with the goal being at the forefront of the conversation.
Both of you need to want to be apart of building the financial strategy. Getting on the same page regarding finances can be tough. Having one person saving as much as they can and the other refusing to join in the ‘not so fun’ game can be tough.
If you are in charge of your own individual finances and find it hard to keep yourself accountable, consider finding a friend who is good with money to be your accountability partner.
8. Use Your Cards
Get into the habit of using your checking account or credit card (ensuring you pay it off monthly) instead of cash.
Using your bank cards makes it easy to keep yourself accountable with your spending. You can print out your statement and see every dollar you spent over the last period.
If you are going to use a credit card instead of a debit card, make sure you are getting the best deal on your current card.
Check your credit card rate and then shop around to make sure you’re not paying more than you need. There are lots of great credit cards that offer low or 0% introductory APR. This could be beneficial if you have current balances that need paying down.
This year has shown us that we simply do not know what is around the corner, and sometimes it’s not great. Being financially prepared today will ensure that your tomorrow is not a crisis but a minor setback in a great life.