How to manage your finances during a crisis?
Situations such as loss of job, critical illness of a family member, debt overhang or even a natural calamity amongst a host of others; can be stressful, both emotionally and financially. If you are reeling under a crisis situation, instead of wasting time on worrying and fretting, you should maintain your calm and take steps in the right direction to tackle the predicament.
Through this article, PersonalFN has listed down steps which can help you to manage your finances during a crisis.
PersonalFN is of the view that while there are ways to deal with crisis situations, it is best to plan for them well in advance. Rather than having sleepless nights later and increasing your stress levels, you must prepare for unforeseen circumstances from today itself.
- Reduce your expenses
Make a list of all your personal and household expenses. This will enable you to understand where to reduce your outflows. Cut out on the expenses on all extravaganzas such as eating out at expensive restaurants, movies, spa and so on. Explain the situation to your family members without losing your cool and encourage them to save money as well. Apart from luxuries, start rationing on comforts and necessities too. Reduce your electricity and telephone bills. Avoid purchases which are not really necessary and can be postponed such as clothes, bags, shoes and so on. Start using coupons, availing discounts and negotiating with the shop keeper for buying necessities such as groceries, vegetables etc. Plan all your shopping trips and outings in advance so as to save on transportation costs and switch to cheaper modes of transportation. Create a household budget and make sure that you and your family members stick to it.
- Find an additional sources of income
You must start finding additional sources of income (such as part time jobs) even if you are already working full time, or probably even monetise your hobbies and interest. You could also encourage your spouse to find a job if she / he doesn’t already have one. This will increase the monthly inflows, which can be really helpful during a crisis situation.
- Renegotiate terms with your creditors
If you in a situation of debt overhang, it would be appropriate to reach out to your creditors and renegotiate terms with them. You can call them and explain them your situation. They might be ready to lower interest rates and / or extend your repayment tenure, thereby helping you to reduce your monthly payments.
- Save on interest payments
If you have too many debts, you must make a detailed chart (including interest rate, tenure, default penalty and so on). This will make it easier for you to understand which debt payments you must clear first. It would make sense to repay your high interest loans so as reduce the burden of high interest payments.
- Sell unwanted items
Over the years, we all accumulate a lot of items both personal and household, which we seldom use. They are kept in the storage forever and simply occupy space. You might consider selling those items even if it fetches you a lower price than their cost, as this would enable you to accumulate funds and manage your dire situation better. But, in case if you have some antiques which you wish to part away with, consult an expert as this can help you fetch a good sum of money.
- Make a list of your assets
Make a list of all the assets that own, and analyse which of them could be sold for meeting your expenses. Check for any money that you have kept aside for such emergencies and use that first. Make sure that you only redeem those many assets which can generate enough money to meet your necessary expenses.
- Consult an expert
You might not have all the expertise to manage difficult financial situations all by yourself. Thus, it would be prudent to take guidance from an expert who can help you to get out of the mess and streamline your finances. They will be able to advice you which assets you could consider redeeming and which assets are best left untouched. However, you must make sure you seek advice from an experienced professional who has the potential to actually help you. Listen to the suggestions given by the expert, but take final decisions only after analysing the pros and cons.
So here below, we have also listed down ways that can help you to prepare for such situations.
Our life is filled with uncertainties. Although you can’t do much to avoid what’s meant to be, it is wise to at least be prepared for unforeseen situations. PersonalFN is of the view that if you follow the above mentioned strategies and be disciplined in your approach towards financial planning, then it will be easier to keep your financial health in pink during all circumstances of life.
- Maintain sufficient contingency reserves
Contingency reserves are funds that are set aside in a savings bank account or liquid fund for emergencies. If you have not maintained contingency reserves till now, you can begin by keeping aside 6 months of your expenses, and later increase it to 12 to 24 months of your expenses (depending upon your monthly expenses, debt obligations, number of dependents and so on). Remember that, even if you have sufficient amount of money in assets such as real estate, physical gold etc., it is extremely important to maintain contingency reserves in a savings bank account or liquid funds as these avenues provide more liquidity.
- Don’t fall into a debt trap
Sometimes we fall into a debt trap without even realising it. Exciting offers in malls and discounts entice us into swiping our credit cards and purchasing things that we can’t really afford. Credit cards charge high interest rates if we do not pay the dues on time. Moreover, having overdraft facilities from banks also give us the feeling of having access to huge sums of money. Thus, debts should be taken only when you are certain that you will be able to service it.
- Have adequate life and health insurance
You must have an optimal life insurance cover so that in case something unfortunate happens to you, your family members have money to meet their day to day expenses and financial goals and do not face any financial crisis. Also, as medical expenses can be very heavy on your pocket, it is essential to have an adequate health insurance cover for all the members of the family.
- Undertake financial planning
The financial planning activity enables you to understand how much and where you need to save for meeting your financial goals such as buying a home, a car, planning a vacation abroad, children’s education, their marriage and even your own retirement. The financial planning exercise takes into account your investment objective, risk appetite, present income & expenses, assets & liabilities, charts an asset allocation and takes into account many more aspects which go in financial planning. So take the help of an experienced financial planner to make a road map for achieving your objectives smoothly.
PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.
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