Life is unpredictable and sometimes the unexpected can hit you where it hurts - your personal finances. Just take the arrival of COVID-19, for example, which meant the loss of income for many people.
The first thing to know when you’re dealing with financial hardship is that you’re not alone. This is, unfortunately, something that many people have to go through at some point in their life.
That said, there are some steps that you can take to help you get back on your feet. Here are five ways to deal with a financial emergency.
1. Don’t make rash decisions
Financial emergencies can be very stressful, which can affect people in different ways. And like any emotionally charged situation, making a rash decision can lead to worse outcomes. So if you’re able to pause, evaluate the situation and think it through before you act, it will help you because the decisions you make can have long-term consequences on your credit and finances. Also seek out advice from people you trust.
2. Emergency Fund
The importance of an emergency fund at a time of crisis cannot be overstated. The purpose of an emergency fund is to have quick access to money, same day or next day, that you can use to deal with emergencies. Instead of having your cash sitting in a savings account where it’s not earning interest, the smarter thing to do is to set up your emergency fund in a money market account where your money is actually growing (through Franc you can get 3.5% in our Cash Fund at the moment). If you don’t have your own savings you could also ask friends and family for help.
3. Access short term credit
If your financial crisis exceeds your emergency fund or your ability to pay out of your income, then you may be able to access short term credit, like an overdraft facility or a credit card, that can help you fill the gap. However, it’s important to know that not all credit facilities are made equal. Before you take on any debt you should know how long you have to pay back the loan, how much interest you will be charged and if there are any additional fees or charges involved. For example, credit cards cannot charge you more than repo rate (currently 3.5%) plus 14% per year, whereas loan sharks can charge as much as 300%!
4. Insuring yourself
Understanding the risks you face in your life and the impact these risks can have on your personal finances is critical. People take out insurance for a reason, specifically when the impact of the insured risk can make a big dent in your savings. To better understand what personal risks you face, read this blog post). Here are a few examples of how it can help to know your coverage:
- Health insurance: Your health insurer may offer opportunities to lower your premiums if you complete certain tasks or questions.
- Car insurance: Understand what you are insured for and what your excess is. Sometimes it may be worth ignoring a small dent or scratch on your car!
- Homeowners insurance: Have a read of your policy, sometimes there are things that you are covered for that you may not expect.
- Renters insurance: If you’re renting or subletting your home, renters insurance might help cover things like property damage or temporary living expenses if you’re displaced.
- Disability insurance: If you’re out of work because of illness or injury, disability insurance may be able to provide some income. There may be both short- and long-term policy options. And they’re often provided through your employer.
Many types of insurance can be costly and we are not saying you should have everything. But figure out for yourself what is essential and what you can survive without.
5. Plan for the next emergency
As mentioned, the best way to handle an emergency is to have savings you can draw upon in times of need. And there are only two ways to save more - increase your income and cut costs. If you’re dealing with unemployment, finding extra income streams or assistance programs, like unemployment benefits, might help. Looking for a side hustle or asking for a raise while you’re dealing with a financial emergency can feel daunting but it might be able to help you get back on your feet faster. The best way to cut expenses is knowing what expenses you have and what you spend money on. Here are some steps you can take to cut expenses:
- Review all of your spending for the past two or three months. This should give you a good idea of how much you typically spend—and where your money’s going.
- Divide your list into two categories: essentials and extras. Essentials include things like housing, food, transport and utilities. Extras might include things like eating out and streaming services.
- Prioritise expenses to know which bills have to be paid before others. For example, letting your internet service lapse is inconvenient, but it's easier to find a coffee shop with free wifi than it is to find a new place to live.
- If you have debt you are paying off monthly, try negotiating with your lenders to see if they will extend the time you have to pay the loan back and lowering the interest rate.
- Now you know how much money you need to cover your essential expenses, create a list of ways to cut expenses and try and tick these off one at a time.