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How to manage a financial emergency

Lots of things have made 2023 feel uncertain, both globally and close to home. War, politics, inflation, divisive conversations and economic shifts are part of our everyday lives.  And they can all affect our day-to-day financial stability.

 

How to manage a financial emergency

 

If you are not in the middle of an emergency right now, go back to the previous post and fill in your financial picture.  Clarity and understanding are important foundation pieces to making good decisions.  If you don't understand what's happening now, you're unlikely to choose the right adjustment to make, especially if you're under pressure.

 

 Step 1  Organize your net income, including the timing of pay & income deposits.  Work out how much you're spending.  Commit to an amount that you can save regularly.  Save it.  Not in your main bank account.

 

Step 2  When possible, build up an emergency account.  When your income is interrupted, or you have a large expense, having an emergency fund takes some of the impact out of the event.  If you have already saved, during the emergency, you're not taking on debt.....which increases your fixed expenses (to pay the debt off).....and emergency will be more contained.  An emergency fund that can cover 3 months of all of your expenses is great.  Coverage for 6 months really buffers the impact of whatever might happen.  If those amounts feel completely out of reach- do what you can.  Start somewhere.  Go back to step 1 and find any amount that can go towards protecting your financial stability.

 

Sidebar  "Can't I use my line of credit instead of leaving money sitting in a bank account doing nothing?"  I used to hear this question from clients all the time.  Now that interest rates have gone up, and the economy feels shaky, I don't hear it often.  Yes, you can use a line of credit if you need time to build an emergency account.  I often recommend that clients have a line of credit available.  It is a tool that can give you flexibility in a financial emergency, when your life is changing and when you need some room that is beyond your regular income.  If the line of credit is your only tool in an emergency, you need to be prepared to pay it off.  The pay-off period will stretch out the time that it takes you to financially recover, and it can restrict your financial choices until the debt is paid back.  It can still be the best solution, depending on your goals and the situation.

 

Step 3 Protect your earning potential.  For most of us, our biggest asset is our earning potential.  We don't put this on a net worth statement, and we often forget that this is the case.  Large expenses and rising debt can interfere with our ability to focus at work.  Losing your job has an immediate impact.  Understanding your financial situation, how much you need every month to cover expenses, how long you can survive on savings, how much you need to earn at a new job, when you need to consider large changes in your lifestyle- all of these things will settle the general financial stress that many of us carry every day.  Be deliberate about decreasing your stress- focus on what you did well in your last job/ what you do well in your current job, the skills that you have, skills that you would like to gain.  Think about how you can add value to a new employer.  It's important that you protect your ability to interview well or continue to perform well at the job that you have now.  Don't let financial stress interrupt your work performance.

 

What you're in the middle of a financial emergency right now?  Slow down, go to Step 1, and work from there.  Don't beat yourself up if you didn't have an emergency fund, or have already used all of it.  Work from where you are.  Know your numbers so you know what you need to do.  Don't guess.  Don't panic.  Protect your ability to earn an income.

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