An unexpected financial emergency can make you feel completely helpless. How to handle a financial emergency should be top of mind at this time.
In this post, I want to talk about the steps you can take to prepare for, and handle a financial emergency.
Statistics show that a growing percentage of Americans have no emergency savings at all!
Whether it’s a sudden layoff, unexpected medical expenses, or an emergency home repair, the sudden hit to your finances can be very stressful.
No matter how uncomfortable the situation, those bills aren’t gonna pay themselves. The lights need to stay on, and you still have to eat.
If you’ve recently been hit by a financial emergency (as many are during the pandemic), there are steps you can take to handle it while reducing the negative impact to your bank account.
Here’s How to Handle a Financial Emergency
Evaluate the Situation
As soon as you realize that you have a financial emergency, take a second to sit down and carefully think it through. Running around in a panic won’t help anything, and it only adds stress.
A little bit of panic is expected. You probably have ten million things running through your head, and staying calm probably isn’t one of them.
But, the ability to keep your emotions in check and mindfully evaluate your situation at this crucial point will help you make the right choices and avoid confusing the situation further.
Once you’ve calmed down, try to figure out the cause of this financial emergency. You’ll come up with answers to your dilemma eventually, but first you need to understand what caused this particular problem.
Any situation can lead to a financial crises, but your plan of attack needs to address the root of the problem, or it’ll just be putting a Band-Aid on a wound that’s bound to open again in the not too distant future.
Organize Your Expenses
Not all expenses are created equal.
Some bills need to be paid before others, and if you can’t afford to pay all of them, you have to figure out which are most important and pay those first.
The most important bills are the ones related to food and shelter.
Letting your internet service lapse is inconvenient, but it’s much easier to find a coffee shop with free wifi than it is to find a new place to live, so mortgage and rent payments have to come first.
Once you’ve figured out which bills should be paid first, you can start looking for expenses to cut back or cut out of your budget altogether. This won’t be a fun process, but the cutbacks will speed up the time it takes to get back on track.
Think about all those cable channels or streaming services. Maybe you can go without the expensive cell phone plan, or maybe you can eliminate your landline. If you regularly go out to eat, consider cutting back or eating at home.
You don’t have to look for major cuts. Small savings can add up.
If you find just five ways to save $20 each month, you’ve instantly freed up $100, and over a year, you’ll have saved $1,200. That money can go a long way in addressing your financial emergency.
Negotiate With Lenders
If you’re having trouble with credit cards, medical bills, or mortgage payments, call your lender as soon as possible. Believe it or not, it’s in their best interest to help you make your payments. They’d rather get some money than none at all, even if it means giving you a lower interest rate or extending your terms.
A common mistake is to wait until you’re severely behind before contacting lenders, and by then, they won’t be as willing to work with you.
If you know that money is getting tight and you might need help, call them before you get behind on payments.
You might be surprised at how willing lenders will be to work with you. Your credit card company may be willing to lower interest rates, and in some cases, it may even temporarily delay payment requirements.
Reaching out to your mortgage company can lead to a restructuring of your loan.
Utility companies often offer programs to help keep the lights on and make payments affordable during times of sudden hardship.
But all these options are a lot less likely to be on the table if you wait to act until threatening letters start showing up in the mail.
Make Extra Money
Ideally, you want to have some money set aside in an emergency fund to help pay for any unexpected expenses, but this isn’t always a realistic expectation.
So, where do you turn when you’ve drained your savings account?
You can always try to get a loan or use credit cards, but this will only make the problem worse.
While borrowing money can provide quick access to cash, it can also come with high-interest rates and a new monthly payment.
These extra payments will extend the timeline of your financial hardship, and if you borrow too much money, you may find yourself in a downward spiral that’s impossible to come back from.
Another option could be to check with friends and family. Nobody likes to ask for money. A little bit of help from a loved one might be all that you need to get through the rough patch. Of course, this can also put a strain on some relationships, so this should probably be a last resort.
And finally, you might have some money available through investments or retirement accounts.
Withdrawing money from your retirement accounts is a bad idea as it can put your retirement security in jeopardy.
Dipping into a retirement account could be your best option if your only other avenue is to borrow money.
If you currently have a 401(k) or 403(b) where you work, check to see if they have a loan provision.
You may be able to borrow funds without facing taxes and penalties, if you take a loan from your account. If a loan isn’t an option, you might qualify for a hardship withdrawal or even a regular premature distribution.
Tapping into your retirement savings should be a last resort. If you’re younger than 59.5-years-old, most withdrawals from a retirement account come with an additional 10% penalty.
Take Advantage of Available Assistance
Another way to handle a financial emergency, is to check into available assistance.
The government has created social programs designed specifically to help people overcome sudden financial hardships.
If you were fired, you could be entitled to unemployment benefits.
Make sure you look into COBRA to see if you can maintain affordable health insurance.
In some situations, you may even qualify for state or federal benefits like Medicaid or Social Security Disability.
Your taxes fund these programs. So make sure to take advantage of them if you need them and if you’re eligible.
If your hardship involves job loss, you may find helpful resources at your local community center. These centers commonly offer workshops and classes on subjects like resume writing, interviewing skills, and networking opportunities.
Planning for the Next Financial Emergency
Once you make it through your current hardship, take steps to minimize the impact of similar events in the future. Start with an emergency fund.
A good rule of thumb is to have enough set aside to make ends meet for a few months. That way, unexpected expenses won’t force you to make difficult choices about basic needs.
Obviously, the more you have saved, the better off you’ll be. Whatever you save up will buy you some time while you get things back on track.
You also want to consider insurance. Most forms of insurance are a safety net. They cover unexpected expenses related to our cars, our homes, and our health.
Having a plan in place before a financial crisis strikes you will take a lot of weight off your shoulders. Know your expenses. Have a few backup plans for how you’ll pay them. It’ll be that much easier to cope with your next stressful situation.