A lot of people in all income brackets are ill prepared to deal with financial shocks.
If a financial calamity like a layoff or illness hit you today, would you be ready?
Brian Watson suddenly saw his hours cut back at his job as a customer service representative.
The abrupt loss of income left him fighting for financial survival. In a panic, he got a credit card to help cover the interim, but he knew it was a bad idea.
“I was having trouble sleeping when I lost the hours,” Watson told Consolidated Credit, a credit counseling service in Florida.
He’s not alone.
A recent Federal Reserve Board survey indicates that nearly 1 in 4 households faced a financial crisis in the previous year. The top financial hardship experiences were:
- 37 percent: Job loss of respondent, spouse or both
- 37 percent: Health emergency
- 29 percent: Work hours/pay cut back
People in all income brackets “struggle to maintain a financial safety net that could minimize the repercussions from such events,” the report said.
In a “financial fragility” test, the Fed asked how people would handle a small-scale disruption that would require them to come up with $400. Just over half (53 percent) reported they could fairly easily pay $400 entirely using cash, money in their checking/savings account or on a credit card that they would pay in full at their next statement. But nearly half, the remaining 47 percent, said that they simply could not cover the expense (14 percent), would sell something (10 percent), would pay with a credit card that they pay off over time (18 percent), borrow from friends or family (13 percent), or use a payday loan (2 percent).
What can you do when an income emergency hits? Take these three crucial steps, says Money Talks News financial expert Stacy Johnson:
Step 1: Assess your situation
Take stock of your income, your bills and your savings. Create a baseline budget, the absolute minimum required for food, shelter, utilities and debt payments (such as auto loans or minimums due on credit cards).
Compare this with your household’s current income. If you see you’re not going to make it, turn to a nonprofit credit counseling agency for some free help. Counselors can help you develop a workable budget, and maybe negotiate with existing creditors.
Our partner, PowerWallet, helps you get a handle on your funds so you can stay focused on the big picture.
Step 2: Track your spending
See where your money is going now, then look for ways to save.
For example, take a bite out of food bills by cooking at home, bringing lunch to work and doing potlucks with friends instead of going out to restaurants.
“Food is a necessity — but food outside the house versus inside the house is a lifestyle choice,” says Certified Financial Planner Larry Rosenthal.
Trim your transportation costs with a carpool, or walk or ride your bike more.
“Do whatever you can to use that car less,” Johnson says.
Even with gasoline prices down recently, AAA estimates a driver this year will spend 57 cents for each mile driven. On average, Americans drive 29.2 miles a day, AAA says. That costs about $16.64 a day — or about $500 a month. Cutting just about a third of that driving, so the average is just 20 miles a day, saves nearly $160 a month.
It made a difference for Brian Watson, the customer service representative who suffered a sudden loss of work hours.
“I started combining trips, which allowed me to decrease the amount of gas that I used in a month,” he said.
Step 3: Trim your monthly expenses
Take a look at your utilities, cable and cellphone bills. These may be small, but they add up. Look at each one individually, and see where you can cut. There’s plenty you can do to cut the cost of cooling a home, from using awnings to turning up the temperature on your air conditioner. You can negotiate lower cable bills, and even cut your cellphone bill in half.
You can also take steps now to prepare for any financial crisis.
- Pay down debt so you can redirect your income toward savings.
- Hoard any windfalls, even of small amounts of cash.
- Track your spending and find where you can reallocate money toward savings.
- See if your employer has a plan that automatically deposits a portion of your pay into a savings, not checking, account.
- Refinance your debt and increase your cash flow.
For more ways to build up a cushion, read: “How to Save Even When You’re Not Making Much.”
This post courtesy of Money Talks News.
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Article last modified on August 23, 2017. Published by Debt.com, LLC . Mobile users may also access the AMP Version: How to Prepare For and Deal With an Income Emergency - AMP.