Are you facing a financial crisis or have you ever experienced facing one before? What is a financial crisis anyway? Different people will interpret a financial crisis differently. Do you remember the article “Confessions of a Shopaholic?” It is about a fictional person named Rebecca Bloomwood who seems to be facing a financial crisis all the time with creditors chasing her at home and at work.
A financial crisis can be triggered for example by an economic meltdown or by a personal tragedy or a tragic event. What are the consequences when one is faced with a financial crisis? The inability to pay the monthly bills, the mortgage, school expenses, medical expenses, and for the purchase of food or necessities are all part of the consequences.
Being in a financial crisis means a person is desperate to ensure he has the money to support his living expenses (including his family’s needs, if any) and to pay all the bills. Some people resort to using their credit cards, take out a loan or borrow money from friends or relatives until their next pay check comes in or until their situation returns back to normal. Those who have some savings or investments may use these to tide them over.
Nobody wants to go through or experience a financial crisis but nobody knows what the future may bring. In the face of uncertainty, it is prudent to make some preparations. Below are 5 actions to take in managing / preparing for a financial crisis.
Prepare a bigger amount of emergency fund
It is usually recommended to have three months of living expenses (single or unmarried person) as an emergency fund. For a person with a family, the amount to prepare is at least six months of living expenses. For those who want to be better prepared can opt to increase the fund amount (recommended).
Settle all credit card debts
Make it a life-long habit to settle all your bills in full each month. If things turn nasty, you do not get caught with unpaid accumulated bills to deal with.
Know where you stand financially
Create a personal balance sheet so that you know where you stand financially at all times. Refer to the article “Your Personal Financial Statement” on how to create one.
Scale down your lifestyle
This entails reducing spending on entertainment, shopping, eating out, going on holidays, etc. This is just commonsense.
Track your investments
If you have been monitoring all your investments periodically, you can easily determine which investment to sell off first to get hold of urgent cash or money. At the same time, you can rebalance your investment portfolio to reduce risk to suit your current situation.
Lastly, the best advice is not to panic. It is common to hear of people disposing some of their current assets or possessions during a difficult financial situation. Once their situation has improved, they start to build up their financial security once again.
Jacquelyn is the co-author of the books “Teaching Your Kids About Money” and “Top 93 Personal Finance FAQs in Malaysia” with KC Lau. Jacquelyn is the pseudonym used by Amy Sipagal.