As you strive to achieve financial goals, it's common to overlook the potential for major financial setbacks -- even though they can strike without warning and often can't be prevented or controlled. But you can take certain steps to minimize their impact.
Financial plan-wreckers come in many forms such as disability, job loss, business failure, ending relationships, or the death of a spouse or partner.
Would you have enough income or resources to survive a financial setback? Is there money available and resources in place if something were to happen tomorrow? It's important to be prepared, rather than trying to pick up the pieces after the damage is done.
If you find yourself facing financial turmoil, your first reaction likely will be emotional. You'll worry that money will run out, or you won't find another job or land on your feet after a break-up with a long-time partner. Worry is normal, but if you find yourself in a crisis, financial experts urge you not to make quick decisions.
During any traumatic experience, you're experiencing a lot of emotion. The best thing you can do is step back, calm down and take a good financial assessment of your situation.
Your first step should be to see what financial professionals you may need to get involved. For example, if your partner died, you may need to contact an estate attorney.
In many cases, your situation won't be as bad as you think. A savings account may help to pay bills. A marketable skill may help to get another full- or part-time job. An insurance policy might cover you after an accident and help you get on your feet. You won't know until you analyze your financial statements.
Ask yourself: Have I set aside enough funds in a checking or savings account to cover at least six months of bills and daily living expenses in case of an emergency? Can I convert my accounts to accessible money without being subjected to stiff financial penalties? Can I surrender an insurance policy or liquidate investments?
Also, ask yourself if all of your money is tied up in investments or accounts with a distant maturity date. You may have savings or investments, but if they are not liquid, they may not help you immediately.
However fuzzy this financial snapshot may be, it's a start.
Now that you know how much money is available, maximize its use. Before you pay bills, set priorities. For example, you might want to use savings and other assets to help pare down debts, but without any income, your savings may need to cover daily living expenses.
Also, remember to consider where you have your money saved. If you have a non-retirement and a retirement account, rely on the assets in the non-retirement account first and hold off cashing out on retirement plans as a last resort to prevent penalties and other fees.
If you know your situation will affect your ability to pay bills, contact your creditors immediately and let them know that you are having difficulty making payments. Ask for another acceptable payment schedule or a reduction in the current payment amount.
Here are some general guidelines on deciding what bills to pay.
- Do not toss bills or forget to pay them. However, some bills are more important than others. The mortgage is more important than the record clubs. Utilities are more important than the dentist.
- Pay bills that maintain shelter and provide vital services such as the telephone and electric.
- Pay the bills on things that can be repossessed, such as your car.
- Pay bills that cost the most to postpone in terms of fees and late penalties
You'll also want to alert creditors if you are breaking up with a partner. You can ask them to alert you if anything strange occurs on your accounts or if a payment is missed or late. Also cancel joint accounts or have your name or your partner's removed from credit cards.
Finally, don't procrastinate. It's natural after a devastating event for people to avoid dealing with issues that remind them of their situation. Fight that urge.
Falling behind on payments can damage your credit report for at least seven years. Employers, landlords, and even insurers request credit bureau information, so a poor credit record can affect many aspects of your life.
Immediately cut unnecessary spending such as dining out, entertainment and new clothes. Implement smart savings strategies such as clipping coupons, purchasing generic products, and avoiding impulse buying. Above all, stop incurring new debt and using credit cards.
If you haven't been through a financial trauma, now is the time to take steps to prevent one. In particular, couples need to sit down and talk about their finances before something happens, especially where one member of the couple handles most of the financial matters. Without the legal protections and benefits of marriage, gay and lesbian couples that their finances are not legally prepared to weather a trauma as well.
A financial setback may be hard to accept, but eventually you can refocus back on the road to financial fitness.