Editor’s note: Right now, we’re in the midst of an emergency. Even for those who have prepared for a financial emergency, funds might be running low. This is a look at how you can do a little financial triage when you’re in the thick of it.
No matter how much we plan for the future, life always seems to hit us with the unexpected during the most inconvenient times. As we continue to navigate this pandemic, many people have experienced a sudden drop in income. And this is on top of dealing with life’s everyday financial emergencies, like the family car breaking down or a panicked trip to the emergency room.
In my case, our air conditioning quit working in the middle of a triple-digit summer. Fortunately, we have a separate fund set aside for these types of financial emergencies. But most people don’t.
According to a Federal Reserve survey, about 40% of Americans aren’t prepared to cover a $400 emergency with either cash, savings or a credit card that could be paid off by the next statement.
If you find yourself in the middle of a financial emergency, here’s what you need to do to triage your finances.
Review the situation
You may not be able to control whatever has caused your financial emergency. But you can absolutely control how you respond to it.
Start by taking a deep breath. And then approach the situation from a logical standpoint.
What expenses are needed to resolve the situation? How will you pay for these costs? What steps need to be taken to minimize the impact of this emergency?
By taking the time to plan out your response, you can avoid costly mistakes caused by a knee-jerk, emotional reaction.
Explore various financial resources
As you analyze your situation, you’ll need to figure out what resources are available to you. This might mean reviewing your checking and savings account balances or locating insurance coverage documents.
Other financial resources may include:
- Your emergency fund. If you have a designated emergency fund, you may be able to cover the cost in full. If this is the case, be sure to put a plan in place to begin rebuilding your emergency fund immediately.
- Unemployment benefits. If you’ve lost your job or had a reduction in hours, you may qualify for unemployment or other government benefits that can help keep you afloat during this financial emergency.
- A low-interest credit card or promotional offer. If necessary, assess your current credit card rates and explore promotional offers that provide 0% interest over an extended period of time. For example, if you have a home repair emergency, you may be able to find a contractor that offers in-house financing or partners with outside lenders. Just make sure you can realistically afford the monthly payment. And plan to pay off the balance in full before the promotional period ends to avoid unnecessary interest charges.
- A low-interest personal loan. In the end, you may need to turn to a loan through your bank or an online lender. Just don’t take out a high-interest, payday-type loan. These can quickly put you in a deeper financial hole.
Additionally, you could ask for help from family and friends. That help could be in the form of free childcare while you search for a new job or work a side hustle to earn extra money. Or it could be a financial arrangement when necessary.
Prioritize your spending
Depending on how you plan to pay for the emergency, you may need to tighten your financial belt for a while. Prioritize which bills need to be paid first (e.g. mortgage or rent) and which can be extended, frozen, or canceled altogether.
There are a lot of expenses in 2020 that feel like necessities, but in reality, they’re a luxury for each of us.
Consider doing away with your streaming services or TV package. Freeze your gym membership for a few months. Forgo your lawn maintenance service. Drop your internet service and use free Wi-Fi at a local coffee shop. These are just a few ways that most people can quickly save hundreds within their current budget.
While it may feel inconvenient at the time, you can quickly find needed money by cutting your expenses back.
Negotiate with lenders and creditors
Your financial emergency may cause a ripple effect with your other finances. If you start to have trouble paying your credit cards, medical bills or other monthly payments, contact your lender or creditor immediately.
Don’t wait until you’re behind on payments. Instead, communicate your inability to pay as soon as it becomes a problem. Most lenders will work with you to set up a new payment plan or provide some form of temporary relief.
For example, utility companies may connect you with affordable programs designed to keep your lights on when you have a sudden hardship. And your credit card company may lower your interest rate or delay your payment simply by asking.
But you won’t be able to take advantage of relief options if you don’t take the initiative to communicate with your lenders. Be upfront about your situation before you start receiving collection notices.
Create a plan and see it through
Once you’ve figured out how you’re going to pay for the financial emergency, you need to see the plan through. This is especially important if you’ve chosen to use credit cards or a loan to finance the emergency.
This may mean sticking to a strict budget for several months or picking up extra shifts until you break even again. These short-term sacrifices will yield long-term benefits.
After you’ve made it through your current situation, it’s time to take steps to prepare for your next financial emergency. Because something will happen. It always does.
Start putting a designated portion of your paycheck into an emergency fund. That way, the next unexpected hiccup will feel less like a complete financial and emotional emergency. And more like a planned, unfortunate event.