Financial Emergencies: How to Weather the Storm

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There has been a lot written about smart budgeting, avoiding debt, and staying on the financial straight-and-narrow, but what do you do in the middle of a financial crisis? Once you find yourself in the eye of the storm, what are the steps and strategies to hunker down and come out the other side as unscathed as possible? With the recession lingering, the job market lagging, and budgets lacking, here are six steps to weathering most temporary financial emergencies. (See also: Figuring the Size of Your Emergency Fund)

Get on the Same Page

If you’re part of couple, the first and most urgent step is to combine forces. Identifying the problem, agreeing on the solution, and understanding each person’s role in the challenge ahead are the foundations of all the other steps. Couples who work as a team as they face financial troubles are infinitely more likely to survive the crisis and may even become stronger as a result. Start by having an honest discussion about the state of your finances and work together on crafting an action plan. Then create regular but brief budget “check-ins” to make sure you’re both on track. Celebrate the small victories together and don’t forget to encourage each other along the way.

Have a Family Meeting

Financial problems affect the whole family. Unfortunately, most parents respond to the issue in one of two ways. Either they attempt to shield their children from the realities of the financial challenges and end up panicking the kids with severe cut-backs without explanations, or they spend too much in an effort to make everything appear normal. Both approaches do a disservice to kids. For children who are old enough to understand, have a frank but calm discussion about why budget changes are necessary and try to be specific about what changes they can expect. Make it clear that the responsibility to fix the problem lies with the adults in the household, but everyone can pitch in and help. The goal is to get the entire family creatively engaged in the solution without creating unnecessary worry in kids who should stay focused on being kids.

Ruthlessly Reduce Expenses

How much money goes out the door is just as important as how much comes in. Take a hard look at your budget to see where cuts can be made. Start with the easy ones first — which fixed costs can be temporarily scaled back, what expenses can be negotiated, and what can eliminated entirely? Can you go from basic cable to no cable for six months? Have you called your credit card company to try to negotiate a lower interest rate? Is there a car that, because of its age and condition, warrants only liability insurance instead of full coverage? Next, focus on just the essentials as you take a more granular look at the other expenses you can eliminate or reduce.

Creatively Boost Income

Boosting income while simultaneously reducing expenses is the double-down solution that fixes budget problems faster. With the job market tight, look for new and innovative ways to supplement your income. Part-time, seasonal, and temporary work might not be permanent solutions, but they can smooth out the rough edges in your budget. Think about your skills as marketable assets outside of your day job. How can you put them to use as a free agent? Get the word out to family and friends and see what opportunities might come your way.

Use Cash

Many folks believe it’s best to float cash when you’re in the middle of a financial crunch. They use short-term credit to pay for the necessities with the assumption that future cash will pay the debts. While this approach may be unavoidable at times, try to reserve it for the roughest situations. Instead, use cash whenever possible — it simplifies spending, keeps budgets current, allows little room for error, and helps avoid a potentially bigger problem later. Though it may seem counter-intuitive, in the middle of money crisis, cash is king.

Liquidate

Let’s face it — most of us are sitting on a lot of stuff. Of course there are exceptions, but as a rule, our homes are filled with baubles and bangles we picked up when money wasn’t so tight. Maybe we inherited things from friends and family, we hit too many garage sales last summer, or our kids adopted and then abandoned a hobby or two. Our garages and basements are testaments to surplus, and that surplus can be an untapped resource. Craigslist, eBay, yard sales, and classified ads are all forums sellers can use to liquidate what’s no longer needed and turn clutter into cash.

The ability to be agile and respond to changing budget realities is the key to weathering a financial storm long enough to come out the other side. With a laser-like focus, a team effort, and some creative thinking, you can emerge smarter, financially healthier, and with more fiscal discipline than before.

What was your financial storm, and what methods did you use to make it through?