Surviving A Financial Crisis
Written by Idara Akan - 05/05/2016
My brother and his wife have gone through a really tough year. First he was laid off from his job and then their youngest child got sick and required several trips to the hospital for treatment. During this time their bank account took a real beating. He’s back to work now and thankfully their son has fully recovered, but it’s going to be a very long time before they recover financially.
This could just as easily happen to me and my family because for the most part, we are on the 30 days make one pay salary plan. It got me thinking what I would do, besides panic, if an unexpected life event or financial emergency was staring me in the face.
For many of us, this is a familiar story. Replace the child being sick with say a parent/parent-in-law being ill or a spouse being sick perhaps with a terminal disease. The list is endless. One thing is for sure, it is a situation where one would have to spend funds not in a budget.
The one constant that is becoming a bigger concern today than in the past is uncertainty; uncertainty about the economy, jobs, retirement and our ability to deal with and manage through a crisis. Financially speaking, thinking about how to prepare for any possible situation can seem like a daunting task, but there are certain things you can do that will help you survive much of life’s curve balls without also facing financial ruin.
Ideally, it is recommended to have a minimum of six months’ worth of income on hand. If you’re not quite there, don’t let that number overwhelm you. When you’re dealing with a tough situation, typically what happens is the amount of money you require is scaled back. You’re going to scale back on discretionary expenses and look after only those core expenses that you need.
1. Establish a Realistic Household Budget
Over the next 1 - 2 months track all of your spending with a goal of cutting your overall expenses by 10%. The money you will need to set aside each month for your emergency savings will come from the savings you realise in your monthly/seasonal spending.
2. Prepare for a Financial Emergency
With a realistic household budget and spending plan in place, determine how much money you will need to accumulate to cover 6 months’ worth of emergency living expenses. This is what a lot of people refer to as their rainy day fund. While it is a considerable sum of money, keep in mind that when a person is going through a financial crisis they will usually change their spending habits and prioritise their expenses to cover their basic needs while scaling back on non-essentials. Six months of emergency living expenses may be the equivalent of 4 months of regular monthly expenses. Why 6 months instead of a lesser amount? Because you never know how long an emergency may last and it’s best to be prepared.
3. How to Build Up Your Rainy Day Fund
Once you have identified the amount of money you need to save up in your rainy day fund, divide this number by the money you have available in your budget each month. This will determine how long it will take you to reach your goal. It will likely take you a few years to reach this goal and you may be able to shorten the time frame at a later date. To begin with it is best to start with a monthly savings target that you are confident you can maintain. Set up a separate savings account at your financial institution and automate your savings by having funds transferred to this account each month or with each pay so that you stay on track with your goal.
4. Keep Your Savings Safe from Yourself
It is strongly recommend that you do not have direct bank card access to this account i.e. no ATM card! This fund is intended for emergencies like a job loss or unforeseen medical expenses, and not for everyday expenses that crop up. Removing the ability to easily access these funds during a weak moment will help you stay on track with your savings. You can fast forward your savings by depositing extra funds that may come your way over the course of a year; income tax refunds, rebates on items purchased or an increase in pay.
5. The Bottom Line on Planning for a Financial Emergency
While building up an emergency savings fund is one of the smartest things you can do to deal with life events, often times the thing that prevents a person from doing so is being overburdened with consumer debt, like balances owing on any loans and lines of credit. My advice is to pay down debt and be careful how much you borrow in the future. Reducing and eliminating debt is an important strategy to protect you and your family against future financial uncertainty.
Along with paying down debt, look to eliminate costly contracts in your monthly budget that commit you to maintaining a certain payment each month. The more flexibility you have in your budget the better. Once you reach your savings goal you can relax a little and then go about identifying other financial goals that are important to you.
Use life’s easier times to establish good money habits and avoid waiting for the unexpected to happen before you change how you manage your finances.
Let us know of any money saving tips you use.
1. Scott Hannah, How To Stop Living Paycheque To Paycheque – Could You Handle A Financial Emergency Right Now?, http://blogs.theprovince.com/2015/11/02/how-to-stop-living-pay-cheque-to-pay-cheque-could-you-handle-a-financial-emergency-right-now/, 5/5/2016.
2. Patricia Kozicka, Money Saving Tips For The Recession Or Any Financial Emergency?, http://globalnews.ca/news/2196714/money-saving-tips-for-surviving-the-recession-or-any-financial-emergency/, 5/5/2016.