As the coronavirus continues to wreak havoc on people's budgets, income, financial stability, and the economy, many people are forced to look at their finances with new eyes.
The truth is, the odds of another financial crisis in your personal life is inevitable. Negative financial events such as a job loss, an illness, or a car accident can leave us feeling hopeless and stressed.
Learn how to turn a personal financial crisis into a temporary setback that you can overcome. The chances of something happening that is beyond your control is high, and it could be expensive. Learn what you can do now to prepare your finances.
Increase your liquid savings.
When you spend less than you make, you need to do something with that money. One of the best things you can do is to create an emergency fund or add to one. Think of it as insurance for life's unexpected events. An emergency fund will protect you against life's uncertainties.
I recommend an emergency fund be part of your short-term goals. The Federal Reserve did a study of the Economic Well-Being of U.S. Households in 2018 and found that 40% of people said they would have difficulty dealing with a $400 unexpected expense (things like new brakes, new tires, or a new water heater). Many in this group said they would put the expense on a credit card or borrow money from family or friends.
When you start to build your emergency fund, your goal should be six months of expenses. You have to start somewhere, so get the emergency fund to $500. Next, work toward $1,000 in this fund. Then, start working toward three months of expenses and, finally, six months of expenses.
Utilizing accounts such as regular savings accounts, money market accounts, online savings accounts, or even saving cash, will help you the most. These resources don't fluctuate with market conditions, which means you can quickly withdraw the money without a financial loss.
Create a realistic budget.
Creating a foundation and road map with the income you do have is critical. You can't change what you don't know, and in a financial crisis, you will have to think and make changes quickly.
Financial awareness is key, and if you aren't utilizing a budget, it will be hard to know if you are currently living below your means. A budget is also the go-to resource for listing out your expenses. This will give you the ability to cut expenses from your life based on importance and priority.
Remember, the foundation of a realistic budget isn't based on what you want to spend, it based on what you are actually spending right now.
It's easy to write down some numbers on a piece of paper. The hard part about budgeting is making those numbers resemble your actual life. The more realistic you are about each of these numbers, the more likely you'll be able to stick to your budget.
If you aren't willing to put in some investigative work, budgeting won't work. It's that simple. You have to be aware of how much money is coming in and how much money is going out. You also need to know where your money is going.
Focus on being prepared, not just paying the bills.
Paying for the necessities to live is extremely important, but making sure we are not putting ourselves further in debt is also critical during a financial crisis.
Car maintenance, annual property taxes, and home maintenance costs can profoundly impact our finances and budget. Creating sinking funds or a savings goal for these real-life setbacks should be included in your financial plan.
Growing your savings might sound a lot like building an emergency fund, but it is different. With an emergency fund, you are setting money aside for true emergencies and the unknown. You should never touch this money unless it is absolutely necessary.
Creating a plan and strategy to save a little bit every month to pay for large expenses that are planned, such as back-to-school costs or Christmas, can help relieve stress during a financial crisis.
Because you had a savings account in place with money, you could adapt to some slight financial challenges in your life without going further in debt.
Pay off your debt.
Reducing your monthly financial obligations will give you additional income to focus on other critical expenses.
Start with paying off high-interest debt, such as credit card debt. The last thing you want during a financial crisis is having your money go towards interest payments. You want to create breathing room in your budget.
Prioritize paying off your high-interest credit cards, then turn to other types of debts, such as personal loans and auto loans. Student loans, however, have more favorable payment options, which makes paying them off less of an urgency.
If you haven't already done so, create a plan to pay off your debt. Part of that plan is being aware of who you owe, how much you owe, and the minimum payments you currently need to make.
Debt is a killer during hard times, and if you don't address the issue now, interest charges will keep eating away at the income you desperately need.
Look for ways to earn extra cash.
Having a safety net in case of a job loss or reduced hours can give you peace of mind that you'll still have a source of income no matter what happens.
With many people safe at home, now is the time to strategize ways of turning a hobby into a side hustle. Earning extra income can also come from other resources like driving for a ride-share or delivery service like DoorDash, babysitting, selling possessions you no longer need or use, or looking for a part-time gig.
Earning extra income doesn't mean you have to set out and start a new business, but you should have options and a ‘plan B' in place. The money you earn from these activities may seem insignificant when compared to what you are earning from a full-time day job, but the income seems like everything when you have no other income coming in.
You never know, what you develop to bring in extra income might turn into a lucrative full-time endeavor.
The bottom line.
Life is unpredictable, and financial hardships can never come at a good time.
Taking steps today to prepare for the unknown will put you in a stronger financial position so you can sleep better at night when the time comes.