Financial challenges can be for any number of reasons. Perhaps you need to prepare for a reduction in household income, the need to fix or purchase a new means of transportation or help someone else in the family with their financial emergency. When faced with a financial setback, we recommend that you assess the short and long-term implications and then act. The following approach might be helpful:
If It’s an Income Setback
- What is the weekly or monthly impact to income?
- How long is it expected to last?
- Can some of the income be replaced?
- Do you have any savings available? Will you be taxed or pay a penalty for withdrawing?
If It’s an Expense Setback
- Is it a one-time expense or ongoing?
- If ongoing, can you estimate the impact to your monthly cash flow?
- If you do not use a budgeting app or software, is now the time to start?
- Can it be financed?
If You Must Reduce Spending
- Determine how you can maintain what is necessary at the lowest cost possible:
- Housing expenses: Can you find or negotiate a lower monthly cost?
- Food, utilities, and transportation: Be creative. Can you stay healthy but lower food costs? Can you use less utilities or commute with others to and from work?
- Create a “survival” budget and do your best to stick to it.
- Contact any creditors and try to negotiate reduced or delayed payments without fees or the reporting of these actions to any credit-tracking agencies.
Consider Potential Resources
- Are there any government or employer programs that could help?
- Any grants or loans at favorable rates?
- Can family help? Possibly loan money or provide food or services?
- Any community programs that provide meals or assistance with necessities?
If you must tap into savings, these are common sources of funds:
- Emergency savings – typically, the first choice
- Accounts that are liquid and don’t entail high fees to redeem
- Retirement account withdrawal or loan
Rebuilding and Preparing for the Next Setback
When you have navigated a challenge and the stress related to your income or expenses has been adequately reduced, it is important to assess how you can be better prepared for any future financial setback.
The Importance of Emergency Savings
Try to build a savings account that would cover 1-6 months of expenses if there was no household income. Don’t worry about how much you are saving with every paycheck. Put away what you can until you have reached a savings goal that will help you sleep better at night.
Sustaining New Habits or Behaviors
- You may have developed new spending behaviors that can be sustained. People often realize that many of the expenses they thought were important are not necessary.
- If you didn’t use a budgeting app or software before, you hopefully are finding that it helps you manage your finances better.
- You may be able to establish or grow other savings accounts by sustaining lower monthly expenses.
Creditors
Communicating with your creditors may be an important step in making your income stretch. If you can, make your payments on time and ensure you are viewed as a valuable customer. Staying on good terms with your creditors gives you more possibilities for the future.
Strengthening Your Support Network
Financial setbacks or periods of uncertainty can force us to evaluate our lives and the people we lean on when we are navigating a challenge. Making time to build stronger relationships and finding room in your finances to grow savings can lead to a much brighter future.
Source: My Secure Advantage