When your financial life is turned upside down, your first instinct may be to panic. Don’t. These expert tips are a much better alternative.
There are few things as stressful as an unexpected financial emergency—like losing your job out of the blue or realising your retirement fund is taking a nosedive. And while panic and dread are natural reactions, they have a tendency to lead to unhelpful, rash behavior.
“When stressed, many people react to money and food in a similar fashion—we either over- or under-consume,” says Priya Malani, founding partner of Stash Wealth, a virtual financial planning company. Spending less makes sense—but why would someone who’s worried about money overspend? Two years ago, Keri, 41, was laid off from her job as a marketing manager in New Jersey, and she says that’s exactly what she did. “Right after it happened, I went out and spent a bunch of money on things I didn’t really need—like my favorite fancy face cream, running shoes, and even a new laptop. At the time, my mindset was that soon I wouldn’t have the cash to buy stuff, so I splurged while I still had funds. Boy, did that crazy spending hurt my bank account in the long run.”
On the flip side, pulling the purse strings too tight may be unnecessary and can also lead to distress. “To avoid these behaviours, it helps to have a plan. When you have a road map to stick to, you’re less likely to give in to fear, stress, or other emotions that lead to counterproductive behavior,” says Malani. To help, we turned to experts to create a set of steps that will get you on the right track if you’re faced with surprise financial woes.
Evaluate your situation
First things first: Come to terms with what just happened. “It’s really important not to beat yourself up with the coulda, woulda, shouldas,” says Bobbi Rebell, a personal finance expert for Tally, an app that helps users pay down their credit card debt. “You are where you are. The sooner you acknowledge that, the sooner you can help yourself.”
Then, dive into the details. If you were laid off, it’s tempting to jump right to cutting back expenses or coming up with new revenue streams—and you will need to do that—but there’s something you should do first. Go over your severance package carefully, and understand exactly what it entails—like how long you’ll continue getting paid, when your insurance runs out, and if you’re eligible for any other types of payouts. Collecting all that data right away will inform your plan in a big way, and it’s crucial to take in all the details.
If what you’re worried about is a bigger-picture problem, like a downturn in the economy, try to assess how it may realistically affect you. “Many people panic, but when they really sit down to think about it, they realise that these things may not have as big of a financial effect as they first assumed,” says Rebell. “For example, if the stock market dips, people worry about their retirement funds. But the only days that stock prices matter are the day you buy and the day you sell. If you’re not planning to touch your retirement fund yet, there’s nothing to worry about. It’s all about perspective.” Even if retirement is around the corner for you, it can be helpful to remind yourself that you’re not drawing on those funds at that very moment.
Once you have a solid idea of what you’re facing, you’ll be working from a place of information rather than fear.
(Also read: 7 Ways to Start Financial Planning Before Turning 25)
Take a close look at your spending
Next, assess how you actually spend money—and determine what you can and cannot cut back on. “It’s not the most fun exercise, but take inventory of all of your expenses, and break them down into three categories: nonnegotiables, negotiables, and nonessentials,” says Malani. The first should contain things that you absolutely must pay, like a mortgage or rent, utility bills, health insurance, car payments, and groceries. Next are things that are less than ideal to cut off—like a gym membership or cable. The last category should contain things that are easy to let go of, like that clothing-rental subscription. Having a list makes it easier to figure out how much you need each month.
Just be sure you’re honest with yourself about how much you typically spend. “Most people live within their means when it comes to the big life expenses,” says Stephanie Genkin, founder of My Financial Planner. “The problem is in discretionary money. When asked, people tend to underestimate how they spend on things like going out to dinner or trips to the salon.” To create the most realistic budget possible, pull bank and credit card statements from the past three months, and go through them line by line.
“You basically want to Marie Kondo your finances,” explains Genkin. “You’ll tidy up and will likely find some stuff you didn’t even know you were still paying for—like an automated subscription or membership that you don’t use.”
(Also read: 15 Ways You’re Unknowingly Sabotaging Your Finances)
Make a budget you can live with
Now that you’ve outlined what you’ve been spending on a monthly basis, it’s time to determine how long you can live on what you’ve got—and start figuring out how to cut back if need be.
Using the expenses you’ve outlined, begin to quantify exactly what you need each month.“Rather than cutting your budget back, flip the concept and start building your budget—starting with zero and adding exactly what you need to survive in a healthy, happy way,” says Rebell. “It’s a simple mindset switch; cutting items feels depressing, but adding them feels empowering.”
Obviously, those nonnegotiables should be the first thing on your list. Then, when you’re weighing the other stuff, think about things you could try to get for free. For example, you may need to ditch your pricey gym membership or some streaming services for now. But that doesn’t mean you have to give up working out or great shows. Many apps and other services offer free trials—try them out, then switch to others before you’re charged.
Once you have your expenses outlined, it’s time to figure out how long you can survive if your finances stay in a challenging spot. “Look at your savings, and don’t forget discretionary savings you may have—like an upcoming trip,” says Rebell. “Based on those funds, you will know just how long you can cover your budget.” Of course, the goal will be to get money coming in before you have to dip into your savings, but knowing just what you can cover and for how long will give you a realistic idea of the worst-case scenario.
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