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How To Deal With Financial Emergencies Before They Happen

Having a financial contingency plan is always important, even more so, now that the economy is more unstable than ever, it is a necessity for every household! Keeping your finances organized when you fall upon hard times is one of the keys to surviving and thriving in these situations.

Here are 6 things that you can do now in order to prepare for financial hardship.

How To Set Up A Financial Contingency Plan

Rather than waiting until you fall on hard times, it makes sense to plan for the worst now, while you are in the best position to prepare yourself. Start with these basic points…

Set Up An Emergency Fund

I have talked a number of times on this site about the importance of an emergency fund. Having money set aside will be extremely important if you lose your job, or face some other financial difficulty. My goal (once our debt is paid off) is to to have between 9 months and a year of our living expenses saved for a “rainy day”..

Many people have gone deep into debt (I’m one of them) because they did not have significant savings to carry them through hard times. The purpose of an emergency fund is to remove the stress, fear, and even the need to borrow, when financial hardship comes.

Every good financial contingency plan should involve a large emergency fund!

Pay Off All Debt

One of the biggest factors in how well you handle a financial emergency is the amount of debt that you have. It is much easier to adjust your living expenses than it is to rearrange your debt payments. So when you are in a position where you need to free up a large amount of committed money, you won’t have over $500 in student loan repayments (that used to be me) to worry about!

Being at the mercy of credit card companies, banks, and other loan servicing agencies, will only add to your stress and may impair your ability to make good decisions during an emergency.

Know Your Options Ahead of Time

Whether it’s an old profession, becoming a part of the contingent workforce, or part-time job, you should ensure that you have a way to earn money that’s not connected to your current full-time job. You may not want to take on that side job, or put more time into your hobby just yet, but knowing what realistic options you’ll have if you are no longer able to work at your current job will be crucial if/when it happens.

Also knowing what expenses you can easily cut and what services you can do without (it may be wise to just cut them now and build up your emergency fund, pay off debt, or save for retirement), can save you from having to make those tough decisions while under stress!

Know Who You Can Depend On

Don’t make assumptions about who will and who won’t help you. Many people who you think you can count on may not be willing or able to help you, while those you’re not even considering could be the ones who offer you the most support during your time of need!

If your relationship allows for it, verify with your loved ones that they would be willing to help out (and find out how) if you fall on hard times.

You may need to consider taking loans from family or living with friends for an extended period of time; it’s best to know ahead of time (if possible), the people upon whom you can rely.

Be Prepared To Sell Your Possessions

I’m not saying that you should start holding garage sales tomorrow, but it is important to have a discussion with your family members and decide what items can go if you fall upon hard times. A good financial contingency plan will take into account how much money can be gained from selling certain items.

It will be much easier to make this plan now, rather than when you are all under the stress of a financial hardship (stress can skew proper judgment)! Decide what things you can part with, and conduct research to see how much you could possibly get for them. Knowing that you can get $7,000 for you 2nd car may be all that you need to survive a financial emergency.

Be Prepared For Natural Disasters

Even though New Jersey has been hit hard by storms in the last few years, I’m not really focusing on hurricane preparedness, or being able to prevent the damage from a natural disaster in this point. What I am referring to is the ability to quickly get back on your feet after the devastation.

The first thing that you should do is create a home inventory. This will allow you to quickly determine what items were damaged (or are completely missing) after the disaster. It will also help you when filing an insurance claim – everyone around you will be filing claims with their insurance company or requesting disaster assistance from the government. Having a home inventory can help to speed up your claims when that happens.

You should also review your various insurance policies to ensure that you are covered against various disasters. Many people just assume that their policy will reimburse them for all of their damages if something happens, only to find out that they weren’t covered at all, when it’s too late!

Reader Questions

Do you have a financial contingency plan? If so, what are some of the things that you have included?
Have you dealt with emergencies in the past? If so, what have you learned from the experience(s)?
Have you ever been hit by the sudden loss of income or dramatic increase in expenses or debt? If so, how did you handle it?
What else would you add to this list?

Seven Dangerous Signs that Show your Debts are Out of Control

By // by guest

[The following is a guest post by Elaine McPartland showing common signs of out of control debt.]

Its 2013, yet Americans are having a hard time saving enough for unforeseen emergencies and even their retirement. Factors like increasing fuel prices, food costs, and other expenses do come into play, but a lot of this has to do with rising credit card debt. As the expenses of the average American household increase over time, people are finding it hard to keep track of their debts.

Here are 7 things that signal that your debts are getting out of control.

1. High Mortgage or Debt Payments

Experts state there is a certain percentage (usually 30%) of your income that determines whether your debts pose a serious threat. If your mortgage or debt payments comprise of 30% or less of your income, you don’t need to worry that much. But once this limit is crossed, you will eventually have to face a financial crisis.

When it comes to credit card payments, they should not even exceed 15% of your gross income. In this way you can still manage other expenses quite well, but once your credit card payments begin to exceed 15% of your gross monthly income, it is a surefire warning sign.

2. You Don’t Know How Much You Owe

A common, guaranteed way of driving anyone towards financial disaster is losing track of how much you owe. If you are in a tight situation, do not avoid your problem and go for consolidated credit counseling. Helpful services from Consolidated Credit include free debt consolidation.

If you are trying to run from your debts, that means you realize that they have exceeded your repayment capacity. Such an attitude can take your situation from bad to worse in no time.

3. You Are Constantly Anxious

In line with the previous point, a clear indicator of uncontrolled debt is your inability to get a good night’s sleep. However, this is only one aspect of the problem, for debt-related stress, for it causes people to become anxious and even paranoid. When you start worrying about how to pay your bills, get help immediately. Otherwise along with your finances, you will lose out on your health as well.

Some people under the yoke of credit card debt resort to using many things to in order to escape from the pressure, but such habits only makes matters worse in the long run.

4. You Can’t Get Credit

Since 2010, the credit CARD Act prohibited banks from increasing your interest rate just because you defaulted on another creditor who is not related to the bank in any way.

However, banks can reduce the credit they offer you even if you make payments on time. The serious problem lies beneath, and as your credit card balances rise, you will soon cross your optimum credit utilization ratio. Your credit score will drop drastically and eventually you will end up with maxed out cards and 0 credit.

5. You Are Out of Savings

As mentioned at the opening, credit card debts have drained up most people’s savings whether it is for emergency or retirements. If you find yourself drawing more from your savings accounts, become alert and find the root of the problem. If you let this go on, you will find yourself without any funds in case of a serious illness or accident.

And even if you are able to repay your debts, you may never be able to retire comfortably.

6. You Are Trying to Avoid Creditors

When creditors or collection agencies start to call you, you should come to terms with the fact that your debts are no longer affordable. Most people start avoiding calls, much to their own peril.

Creditors do not go away, and they can even take serious measures like harassment and litigation if you try to avoid them.

7. You Are Constantly Taking Payday Loans

Payday loans are a practical option for customers to take care of their short term expenses in times of emergency. However, if you are constantly taking out such loans to meet your monthly bills, then you have already jumped in quicksand. Get out before you sink in all the way!

So, if you find one or more of these signs in your life, it is time to get serious about your credit card debt. The longer you delay the worse the situation will become.

About the Author

This article is composed by Elaine McPartland who is associated with “Consolidated Credit” as their community writer. In the above article, She has mentioned worst dangerous signs that shows your debts are out of control. You can add her at her google+ profile.

photo credit: Freedigitalphotos.net

4 Reasons That People Fail With Their Finances: What I Have Learned As A Credit Counselor

By // by guest

[The following is a guest post by Kevin, a credit counselor who blogs at DebtEye]

Over the past few years, I’ve met with hundreds of clients face to face who were looking to get out of debt. They come to me looking for tips & advice on different ways to get out of debt.

As a credit counselor, we must closely examine their financial health before recommending any type of debt relief program. I usually preface the counseling session with, “How did you get into debt? What happened?”

After listening to their stories, it’s interesting how you can see a pattern after speaking with hundreds of people in debt. You would probably think that a lot of them suffered some sort of catastrophic financial hardship such as: losing a job, death in family, or unexpected medical expenses, without an emergency fund. Think again!

4 Reasons People Fail With Finances: What I Have Learned As A Credit Counselor

After listening to my clients, here are the patterns I started to notice:

Huh? What does APR mean: I ask all my clients to bring in a copy of their most recent credit report, or a copy of their latest credit card statement. When I ask them what their APR is (before I look at their statement), most of them have no clue what I’m talking about. Everyone who carries credit card balance should ALWAYS know how much in interest their paying every month! Read the fine prints!

I think I spend $200 in food: If I asked you how much your mortgage was, or even your car payment, chances are that you would be able to tell me right away. What if I asked you how much you spend on food every month? Most people don’t keep track of their expenses. I know it sounds cheesy, but starting a budget worksheet will help you organize your finances.

Your mortgage is how much? : What ever happened to the 31% housing ratio rule? Do people not follow it anymore? Over 60% of the clients had their housing ratio 31%+. It’s no wonder they have no money left over every month! When you plan to buy a house in the future, do yourself a favor: Stick with the rule, or be part of the statistics (like one of the many going through a Bank of America foreclosure).

Today, today, today: Most people only care about the present. They only care about how much money they can save today. How can I lower my monthly payments this month? If I borrow money today, I can pay it back tomorrow. This is a dangerous path to follow. Stop thinking about today, and start thinking about the future!

I’m sure many of you may be guilty of some of the things I mentioned. If you’re not in financial distress, consider yourself lucky! I recommend everyone to really take a close look at your personal finance. I don’t want to see any of you in my office!

Kevin is a co-founder @ DebtEye where he helps people get out of debt by finding the optimal solution to pay off credit card debt. He is a certified credit counselor and previously owned a credit counseling company before joining the DebtEye team.

photo by Chris Sharp