Many people have heard or read something about establishing an emergency fund – especially in the last few years.
However, having an emergency fund is only one step in preparing for a financial hardship. It is also important to have a contingency plan in place when these financial hardships strike.
Why is it important to prepare for financial hardship?
Just like those who live in a flood-prone area need to have a plan for surviving a flood (knowing evacuation routes, having food, clean drinking water, supplies, etc), those who are prone to financial disasters (anyone with less than net worth of $1 Billion ) need to be prepared as well.
Also, building up an emergency fund can take time, especially if you are just getting started. However, developing a financial contingency plan is something that everyone from every walk of life can do today.
Even if you have an emergency fund in place, an unexpected event can leave you in a very undesirable position. You must be able to adjust your lifestyle in order to be successful in the middle of financial hardship!
What expenses can I cut?
This is probably the first and easiest step in developing your contingency plan. Evaluate your expenses and determine which ones you could easily cut if necessary.
I’m sure we can go on and on about what unnecessary expenses you can cut, and everyone’s list would be different; but the main point is that you have to think of these things before the emergency hits. Talk this over with all the members of your household and see what current expenses you all could do without.
Deciding these things beforehand will be much easier, since financial hardships tend to stir up strong emotions and make it hard to focus on the task at hand. Avoid the stress, the arguments, and the finger-pointing by making the tough decisions now, before the emergency strikes!
Do I have anything I can sell?
On top of looking at what expenses you can cut, you should also look at items that you can sell. Many of us have items that are of some value to us and others, but we can live without them.
For instance, do you have a fancy lawnmower? Sell the fancy one, and buy a simple, used mower. This may not be ideal, but neither is being in the middle of a financial disaster with a fancy lawnmower, yet not enough money to make another mortgage payment!
Maybe you can sell your car and find alternative means of travel – or buy a cheap, used car and use the profits to help you survive the financial emergency.
If the emergency lasts long enough, or the financial disaster is large enough, consider selling your home and renting. Of course this only works if your house can sell for more than you owe (not the case for many who purchased within the last 5 years)!
Look at everything that you own, and decide what you can sell now. This is another tough decision that should be made before the emergency comes.
Do I have any debt that I can refinance?
If you can’t sell your home, then refinancing may be the next best thing. Just make sure that the terms of the loan will actually reduce your payments. This mortgage refinance calculator is a great tool to help you make this decision.
Student loan consolidation can also be a very helpful solution. Since the average student walks away from college with thousands of dollars in student loan debt, it’s safe to assume that if you are reading this, you have a student loan. Refinancing or consolidating this debt can save you hundreds of dollars each month!
Don’t forget to check to see if any of your credit cards offer low-interest balance transfers. This may help to free up some money in the short run and give you more flexibility during an emergency. Of course, you have to be sure that the interest saved is more than the fee charged for this service.
If you have a car or personal loan, be sure to see if you are in a position to refinance these as well. Although not as common as the options listed above, while preparing for a financial disaster, you should look into all options!
Can I earn extra money?
Earning extra money is an option that often gets overlooked. However, it can be the key to surviving a financial emergency. Don’t be afraid to look into jobs as a consultant, stocking shelves, delivering pizzas, or any other job you can get quickly!
Are there things that you love doing that you only consider a hobby? Well, turn your hobby into a business and fight your way through hard times doing what you love! If the hardship is more than temporary, you may risk falling out of love with your hobby – but then again, disaster planning may call for a few risks!
If you begin to look around your neighborhood now, you can determine what opportunities may open up for you when you need it. This is especially true when you need several hundred bucks or more each month just to make ends meet.
It doesn’t have to be as hard as looking for a second job. Try to get some overtime at work, or work toward earning a raise or bonus. Of course, if you do that now and save the difference, you’ll be in much better shape when disaster strikes!
Am I currently throwing away money?
Many of us are not taking full advantage of our situations in order to bring in more money. I’m not talking about getting a second job, or turning your hobby into income like above. There are various ways that we could earn or save money that we don’t take part in (such as establishing a Flexible Spending Account).
Read about 6 ways to find free money that can really have an impact on our current financial situation.
That sounds like a lot of options!
Yes, it does. Wait, that wasn’t a question!
Anyway, the major point that I want you to remember is to start planning for financial hardship today. Call a family meeting and discuss these points, create a financial contingency plan, and face the next emergency with confidence!
Ok, so my question to you now is…why wait? If you have followed these points you have now discovered expenses that you can do without, items that you can sell and still survive, debt that you can refinance and/or consolidate, ways to earn extra income, and ideas for finding free money!
If your financial situation is anything less than perfect, then implement these actions today! I mean it! What are you waiting for?
This is how you can avoid having so many financial disasters!
Do you have a financial contingency plan?
What costs will you cut?
Have you found any ways to earn extra income?
Have you decided to implement these steps before the emergency?
Do you have any tips to share?