Personal financial crises can come out of nowhere. You’re cruising along just fine, paying your bills, making ends meet and then suddenly you’re not. Your car breaks down, your house floods, or a global pandemic drives you out of work and into quarantine.
“When financial problems arise, some people would rather turn a blind eye to them, but that’s not a good long-term solution and can be dangerous,” says Linda Sander, senior vice president of indirect lending at Axiom Bank.
Feeling anxious during a personal financial crisis is natural, but staying calm and planning are key to pushing through a tough time.
“If you happen to find yourself in a financial mess, do not panic,” says David Almonte, certified public accountant and member of the American Institute of CPAs’ National CPA Financial Literacy Commission. “Take stock in where you are financially, and reach out to an expert for help if need be.”
That help can come from either a financial advisor or a group such as the National Association of Personal Financial Advisors, which offers free guidance.
Meanwhile, you can take these steps to manage credit during a personal financial crisis:
— Take stock of your financial situation.
— Reduce your expenses.
— Avoid taking on new debt.
— Develop a repayment plan.
— Prepare for a better future.
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Take Stock of Your Financial Situation
When a personal financial crisis arises, “Understanding your overall financial wellness is critically important,” says Ken Verzella, head of the financial wellness group with Massachusetts Mutual Life Insurance Co.
Start by assessing your assets and liabilities. Assets are sources of income and resources of value that you can convert into cash, such as cars, homes, bank accounts and investments. Liabilities, on the other hand, are the debts you owe, such as loans, credit cards and monthly utility bills.
Sander recommends using a spreadsheet or pen and paper for this exercise. List every source of income and expense for your household.
“Be as thorough as you can because this list will be the framework of your budget,” she says.
If you’ve lost your job, immediately apply for unemployment benefits, says Neal Stern, CPA and member of the AICPA’s National CPA Financial Literacy Commission.
“Your state may have a waiting period, and processing of your claim may take some time, but prompt action can help you get cash in the door before bills start to come due,” Stern says.
Reduce Your Expenses
As you tally your liabilities, try to divide them into needs and wants, Verzella says. This will help you identify which expenses you must cover and which spending categories you can reduce.
The goal is to eliminate or reduce as many unnecessary expenses as possible to avoid the need to tap other sources of income, he says.
Look closely at recurring expenses, such as subscription plans and utilities. These costs may not be set in stone.
“Sometimes subscription services like telephone, cable and internet service can be negotiated,” says Tony Wahl, director of operations at Credit Sesame, a credit monitoring service.
He also recommends reaching out to lenders to discuss short-term payment relief options. “This can help prioritize your bills and free up some of your available cash and credit for necessities like groceries and pharmaceuticals,” Wahl says.
Avoid Taking on New Debt
“If your emergency savings does not cover basic living conditions over a crisis period, you might be forced to take on additional debt,” Verzella says.
Before you take on any new lines of credit, be sure you fully understand the terms. For a loan, that includes the interest rate and repayment period.
Jim Adamczyk, senior executive vice president and chief lending officer at Fairwinds Credit Union, suggests avoiding lines of credit and credit cards, if possible. Instead, he says, “Ask your financial institution about installment loan options that have a fixed rate and a fixed payoff date, so you can pay off the loan as quickly possible.”
Also, beware “buy now, pay later” financing that may not require payments for several months or even years. “It’s easy to forget those payments are still out there,” says Matt Rosenberg, president of RoseCap Financial, Grand Junction, Colorado.
If you own your home, a home equity line of credit may be an option to explore. With a HELOC, you tap the equity in your home to pay for major expenses, says Glenn Collins, investment advisor at Assurance & Guarantee in Burlington, North Carolina.
“And since a HELOC is secured by the equity in your home, the interest rates may be lower than many unsecured types of credit,” he says.
Another option, Stern says, is borrowing from your retirement plan, although this should be a last resort. Dipping into retirement savings could derail your long-term goals and leave you with a hefty tax bill.
If all else fails, you could ask for a loan from someone you know. But, cautions Sander: Treat it no different from a bank or credit union loan.
“Lay out direct terms and stick to those. If you run into trouble meeting those, be sure to communicate any changes upfront and honestly,” she says.
Develop a Repayment Plan
Surviving a financial crisis takes having a plan before the crisis, Almonte says. “This is the best way in which to protect yourself and your loved ones leading up and into times of uncertainty,” he says.
If you’ve lost income because of the coronavirus, you may need to take on debt to cover bills. But resorting to debt without a repayment plan may be like putting a Band-Aid on a gushing pipe and lead to bigger problems later.
Having a debt repayment plan is important because it removes the emotion that typically accompanies times of crisis and uncertainty, he says.
For this reason, Sander adds, debt repayment must be a “need” in your budget. ” Falling behind on payments can cost you more and harm your credit in the long term,” she says.
Two proven debt payoff methods are called debt snowball and debt avalanche. Debt snowball focuses on debts from smallest to largest, while debt avalanche prioritizes debts from highest interest rate to lowest, regardless of the balance.
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Prepare for a Better Future
Once you’ve made it to the other side of a personal financial crisis, spend some time to prepare for the next setback. Think about how your behaviors help or hurt your finances.
“It is helpful to examine your habits to understand how you arrived at your current financial situation,” says ShirleyAnn Robertson, a Prudential Financial advisor.
Look at your spending habits before the crisis to see what contributed to the crisis and what helped get you out.
Simple spreadsheets or budgeting apps can help you see spending habits and find ways to cut costs.
One of the easiest ways to prevent a financial hiccup from becoming a crisis is simply to pay your bills and loans on time. By doing so, you will not only avoid interest but also access credit at better rates.
And if you don’t have an emergency fund with a six- to eight-month cushion, make building one your first priority. That cash can help you avoid taking on more debt, selling investments or tapping savings earmarked for longer-term goals, such as retirement.
Start small if you need to. Refer to your spreadsheet or budgeting app to find areas where you can siphon even a few dollars into your savings account.
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