Do you remember the time you lost your job.? Thoughts like ‘How will I pay my rent, child’s tuition fee, EMIs’ , ‘What will I do in an emergency or someone falls ill’ often popped up. These are the thoughts which cross a person’s mind during financial crisis.




I used to have the same thoughts when I was between jobs or self-employed in earlier days. I didn’t have enough saved money and cash was always a problem. I had more responsibilities as well (even from my college days). Two households (parents not earning and stayed in native town and I was with my family in Chennai or Bangalore), my marriage, child’s expenses, sister’s education etc.,.

I was always confident of managing them but the thoughts would always keep me occupied( read stressed ). I’m not wildly rich like some guys. I’m a common person whom you encounter daily in you neighborhood or at work. So we all will feel the pinch in a crisis.

You must have similar experiences. A personal financial crisis may be caused due to any reason. A negative event such as job loss, accident or medical emergency. This has a profound impact on the finances and keeps anybody awake all through the night.

However, being prepared with the finances helps in reducing the stress that one experience in such cases that are beyond control. Preparing the finances is an essential act in life.

A proper planning protects a person from falling as a prey to adverse or ill effects that arrive at the doorstep throughout the life. I have shared a few actions that an individual can implement to minimize the negative impact during a financial crisis.

How to overcome a personal finance crisis

• Liquid Savings/Emergency Fund
  

Liquid savings have are the best buddies in handling the financial crisis. Therefore, it is preferable to increase the liquid savings to the maximum to ensure that they provide the needed support at all times.

Some people like to call it the emergency fund. An Emergency Fund usually contains a minimum of 6 months gross expenses. I used to pawn/sell jewellery or borrow money to raise money in an emergency. After I created an emergency fund, I don’t do them anymore.

Certificates of deposit, short-term government investments, cash in savings account and money market accounts offer the best support in a crisis. Gold jewellery is also fairly liquid. Additionally, an interesting quotient of these components is their steady market value.

Unlike other investments, the above options have a constant value. There is not much short-term effect of the market conditions such as economy in downturn , interest-rate on these liquid investments. These factors however affect stocks, exchange trade funds, etc.

Moreover, it is always easy to take the money whenever there is a requirement without worrying about the financial loss. It is because there are no early withdrawal penalties liable on these accounts, except deposits.

Withdrawing from CD, fixed deposits requires forfeiting a part of the earned interest. The value depends on the amount and the number of months for which the account stays open. But you lose part of interest only in exchange for liquid cash.

Short term investments in stocks is not a good option. The value fluctuates and one may even incur losses if liquidating in an emergency. However, it is preferable to invest in stocks over long-term after there is an ample amount held as liquid savings.

It is also preferable to count the regular expenses and major constraints such as mortgage or tuition payments when planning for an emergency fund. All these elements assist in proper planning for a financial crisis.

Useful post: How to choose savings, investments best for you needs

• Prepare your Budget Sheet before financial crisis
  

Most people do not manage the monthly budget and end up spending more than they earn. Keeping a track of the finances is essential to look at the unwanted expenditures in a month.

Curbing the spending is a good way to save money and maintain a healthy amount in your savings account. Preparing a budget sheet always helps in monitoring the monthly activities. It includes house rent, grocery bill, electricity charges, water charges, fuel charges, tuition fees and others.

The sheet is a helpful tool. It gives an outline on where money is spent and whether the spending is making a person happy. It also does  not exaggerate about your financial position.

With complete details portrayed in the sheet, cutting unwanted expenditure becomes possible. The saved amount again goes into your emergency fund that can cover unforeseen circumstances.

• Reducing expenditure – cost cutting

Spending unreasonably hurts your personal finance in later stages. Although many individuals maintain a  few savings amount, fulfilling an emergency may be out of the question.

We tend to spend on unwanted things, which have no real use in the daily life. Getting ready to cut what are not necessary supports in building a strong savings fund. Cutting these little things matter the most at the end of the day.

For example, most people pay a certain fee for their landline even if the usage is below the stated consumption. Switching to a different network that offer pay-as-you-use is the best option under such conditions.

In addition learn about the best interest rates offered by the banks. This is helpful in opening savings accounts and fixed deposits, as they yield good returns for the same price. Cutting costs and searching for the best options to invest is the beginning towards reduction of excessive spending.

Trimming electricity charges, choosing the best insurance and others are a few things that help in cost cutting. Just like business corporations, managing personal finances is vital to stand against any odds presented in a financial crisis.

• Managing Bills
  

A close watch over the bills prevents from paying late fees or added costs that all together stack up the total payment. Organizing the bills helps in reducing extra charges levied by companies under the name of late payment.

For example, a late credit card payment attracts an additional charge along with service charge, increased interest rate and late payment. Combining all these will increase the actual payment, which over a period becomes a burgeoning amount.

By organizing the bills, avoiding these penalties is possible. Using auto pay options or electronic clearance system in payment of the bills, you can pay on time without incurring late payment and surcharges. Such small savings are crucial during the financial crisis and helps to support the family for necessary expenses.

• Increase/Redeem non-stock assets
  

Non-stock assets are always helpful when required. Things like availability of groceries, frequent flyer miles, reward points, and gift cards, count towards reduction of unwanted expenses. Cash/redeem them.

For example, last year I bought few dresses for Diwali just using my Payback points. Absolutely no cash. One of my friends, just uses his necessary credit card expenses to earn flyer points. He will buy groceries, dresses, online purchasing with his credit card. He will then use these points to book a flight ticket. But remember to pay full credit card bill on time   .

Also keeping an eye on the availability of the grocery in the house, helps in reduction of the spending. Moreover, it prevents from purchasing the same product repeatedly.

Why should you pay cash for dresses or groceries or any item which you can redeem or won’t use now?

This reduces waste and improves efficiency, which helps in maintaining healthy cash savings. Understanding what is necessary and prioritizing important expenses also prevents from buying/spending on unnecessary things.

• Sell Unwanted Household items

Everyone has unused items which you never use. You would have bought them on an impulse. I have seen many people who have treadmills they never use. They bought it keeping their new year resolution ‘GET FIT’ in mind. But they never use them. Sounds familiar ?

For example, I sold my cricket kits, some bad books, unused refrigerator to raise cash. I have also seen people selling their car and use rented car for few months. What is use of owning a car when you’re financially stressed?

Read: Buying-vs-Renting a car- Which is better?

• Managing debt

Debt can be in any form and the longer it exists, the more it squeezes from the pocket. Most people choose the long-term repayment option, as it attracts little monthly payment. However, the end total payment is rather extraordinary, and sometimes people pay double or triple the actual cost of the original amount.

Handling loans and debt requires careful financial planning. Gathering all sources of income will assist in managing the existing debts and clearing them at the earliest.

It is also possible to combine multiple loans into a single debt, provided the institution offers the facility. Speaking with various financial organizations in the market will provide insight into the actions that can reduce the overall installment without affecting the credit score.

You must try pay off debts as much possible. If that is not at all possible, either switch to a low cost lender( Research first) or extend your term of loan. Banks will accept to extend the term rather than have you default.

• Increasing sources of income

Increasing the sources of income also helps in avoiding financial crisis. The money earned through the different ways will be helpful in maintaining your boat from sinking.

There are many different ways to earn additional income. It just needs some time to think the right way and manage the available time to plan a schedule that will help generate extra income.

Part-time teaching, selling on the internet, freelancing and using available skills to earn money are all useful.I have done all the above and earned money. So it is real. For eg., If needed, I can put up advertisements on my websites and start earning from that too. You just need the will and hard work.

I plan to write write detailed posts about how to make money genuinely from other sources. Subscribe and get updates if you’re interested.

• Routine maintenance

Apart from organizing stuff and creating new income sources, it is essential to maintain the flow of activities. One should not fall behind their everyday activity, as it could pose a serious trouble during the financial crisis.

In addition, keeping good health is also vital. All these aspects play a greater role in avoiding emergencies that seek immediate monetary relief.

Conclusion

Nobody has control over the future, and it is unpredictable. However, being prepared is the right choice in avoiding a significant damage during a crisis.

Planning and preparation together help in building a foundation of money that can pull an individual or an entire family out of a financial crisis.

Therefore, the key to success in life depends on how a person earns, spends and saves according to their necessity. Overspending always hurts and positions the person forever in the danger zone.




What do you think ? Share your experience in the comments section on how you overcame your personal financial crisis. We like to learn from everyone.