We’ve all experienced unexpected financial emergencies—a car breakdown, income loss, job loss, pay cuts,or even an unexpected medical bill. When these emergencies hit us at the worst times, a financial crisis is waiting to happen if you are not prepared for it. Here are 7 steps that can help you control financial setbacks and make them less threatening.
- Make a Budget
If you aren’t aware of how much money comes in and goes out every month, you wouldn’t know how much you need to have in your emergency fund. And if you don’t have a budget, you will never know whether you are living below your means or stretching yourself.Financial planning and budgeting are a good way to keep track of your finances and avoid a financial crisis.
It gives you a clear picture of where you stand financially and helps you manage your finances better. So, take a pen and a paper, and jot down all your monthly or annual expenses, income, taxes, and anything that can potentially affect your finances to figure out where you are and where you need to go.
- Check Your Insurance Coverage
Having excellent insurance coverage can help you when in a financial crisis. Make sure that you have optimum coverage and not just the bare minimum for the policies you already have or for the policies you intend to purchase. Consider getting a disability insurance policy if you have an illness that can prevent you from working. Also, think about getting an umbrella policy that can cover you where other policies can’t.
- Improve Your Liquidity
Bank accounts such as checking and savings and money market accounts such as fixed deposits or short-term government investments are low-risk as their value does not fluctuate with market conditions, unlike stocks and mutual funds. These are the resources you should turn to when in a financial crisis because you can take your money out from them at any time.
If you do not have at least three months of living expenses saved up in your emergency fund, don’t invest in stocks or other high-risk investments.
When an unplanned expense crop up when you have low liquidity, instead of dipping into your savings or disrupting your long-term investments, consider getting a quick personal loan. There are various online lending apps that offer instant personal loans with flexible repayment options.
- Look for Ways to Increase Your Income Sources
Don’t rely on just one source of income. Consider finding a passive source of income. A part-time job, rental income, a small business, or a freelancing project – anything that can be as a safety net to land on if in case you lose your primary source of income.
- Pay Off Your Credit Card Debt
Credit card debt can take up a significant portion of your income. Consider paying down your debt. It will not only reduce your monthly financial obligations but also free up some money which you can either save or invest. If your finances don’t allow you to pay off your debts, consider getting a debt consolidation loan or a low-interest personal loan.
- Prioritize Routine Maintenance
Keep everything in top condition – be it your car, home, or your health. If you see any minor problems, rectify them when they’re small to avoid big expenses later on. If you think you don’t have the time or money to keep up with maintenance on a regular basis, you couldn’t be more wrong. These minor issues can cause much larger disruptions of your time and finances in the future.
- Keep Learning
The above mentioned are some of the ways you can avoid a financial crisis. But the learning shouldn’t stop here. However, it doesn’t mean you have to experiment with your financial freedom to learn new ways of preventing a financial crisis. Learn from your past mistakes, talk to financial experts, read books, or watch videos. The more you learn, the more prepared you’ll be to handle a financial tragedy.
The Bottom Line
Life is uncertain. But you can ward off a financial crisis by being prepared for it. With the right preparation, you can convert a financial crisis into a temporary setback.
Lily Tran is a content writer, working for MoneyTap, who writes about all things Finance. Her passion for credit, debt, loan & investment drives her to help readers get an insight about everyday finance.