How to Prepare for and Survive Financial Hardship
In many cases, an unforeseen emergency—like an accident or job loss—can derail your financial plans. However, there are steps you can take to soften the impact of an unexpected hit to your finances. Here are a few tips on how to prepare for and survive financial hardships.
Advance Planning
Build an emergency fund. Setting aside cash ahead of time to cover unexpected expenses can help ease stress when an emergency arises. Keep these funds in a savings account or other safe place where you don’t incur investment risk and can have immediate access to the money if you need it. Three to six months of savings in an emergency fund is a good goal, but putting aside any amount that you can afford is helpful.
Include savings in your spending plan. To keep your finances in order, track your monthly income and expenses. Then make saving a part of your budget: Set an amount to be automatically withdrawn from every paycheck or schedule recurring deposits to your savings account. Consider depositing some of these funds into an individual retirement account (IRA) to begin saving for retirement. And if your company offers a retirement plan with a company match, try to contribute at least enough to take advantage of that. Even if you can only set aside small amounts, your savings will add up over time.
Maintain health care coverage. Medical and other related health care costs can quickly spiral out of control if you don’t have health insurance. If you have health insurance through your employer and lose your job, you might be eligible for temporary continuation coverage under COBRA, a federal law that typically entitles you to continue your employer's coverage for 18 to 36 months. Free or discounted health care might also be available through financial assistance programs or under certain provisions of the Affordable Care Act.
Use credit wisely. There are times when it makes sense to incur debt. Remember, however, that credit cards’ high interest rates mean balances can grow quickly. Repaying any debt you accumulate needs to be part of your budget planning.
Survival Mode
Act quickly to reduce spending. If you lose your job or face an unexpected expense, you might have less money available to cover your usual costs. Take immediate action to reduce spending wherever possible. You might need to modify your monthly budget for a while. Consolidating debt, eating out less, taking steps to cut down utility costs, reducing your number of streaming or subscription services, freezing credit cards and switching to less expensive home and car insurance are some potential strategies.
Assess your short-term situation. Figure out how much cash you have readily available or can get on short notice, how much you owe—mortgage, rent, credit cards, car loans—and the monthly payments associated with those debts. Establish how long you can make ends meet on the financial resources you already have.
Ask about dislocated worker services. Your employer may work with state and local officials to provide services such as job placement, retraining or resume writing. If you’ve lost your job, take advantage of these services—make finding a new job your full-time focus. If you belong to a labor union, ask what they can do to assist you.
Look into unemployment insurance. Your state unemployment insurance office can tell you whether you qualify for coverage and how the insurance may be affected if you get other payments from the company. Knowing how much you can claim and how long you can expect to receive unemployment benefits will help you handle your finances. When you file for unemployment insurance, state regulations generally require that you also register with the state's employment service so you can start looking for a job immediately. Be aware that collecting unemployment benefits while working is illegal. You must report the date you begin to work, either full- or part time, to your state’s unemployment office.
Explore social services. If you’re having trouble making ends meet, government benefit programs might be able to help. Contact your local department of human or social services to determine your eligibility for programs that provide assistance with food, housing, health care and child care expenses. If you’re over 65 or caring for an elderly family member, make sure to maximize Medicare and Social Security benefits. You might also want to research local food banks or organizations that supply essentials like hygiene products and diapers and formula.
Take advantage of flexible spending accounts (FSAs): If you’re enrolled in an FSA and the coverage period has begun, consider spending the money while still employed for items or services you know you'll need. While FSA funds typically expire upon termination from a job, IRS rules allow you to withdraw the full amount you elected to contribute once the coverage period begins. If you’ve been reimbursed for more than you’ve contributed at the time of your termination, you don’t have to repay funds that were used on eligible expenses. Check with the IRS for a list of allowable expenses.
Take control of medical bills. Even if you have health insurance, bills from medical emergencies can pile up quickly. If you’re faced with significant medical expenses, ask your provider if you qualify for discounted care. Under the Affordable Care Act, hospitals are required to offer financial assistance programs to eligible patients. If you don’t qualify, many health care providers offer interest-free or income-based repayment plans. You also might be able to apply for a medical credit card with a zero-interest introductory period, which can give you time to pay down your bill. However, make sure you know when the promotional period ends and what the new interest rate will be so you don’t accumulate high charges on any unpaid balance.
Address rising rent. Housing makes up a major portion of many people’s budgets, so a jump in these costs can be destabilizing. First look up your local rent control laws, as they vary widely by jurisdiction. Even if there’s no limit on how much rent can increase each year, make sure notice was provided in the time required. Then, see if your landlord is willing to negotiate; if you’ve been a reliable tenant, they might be willing to lower the rate to avoid having to find a new renter. You might ask to sign a longer lease or give up an amenity you’re not using, like an extra parking space.
Get financial advice. During times of financial stress, employer-provided services, state or local employment agencies, credit counselors and financial professionals can serve as valuable sources of information. Working with an investment professional can help you to become a more disciplined saver, better manage your investment risks and avoid potential scams. They can also advise you on how early withdrawals and transfers from your retirement funds might lead to costly tax consequences and penalties that might deplete your savings. Research investment professionals using BrokerCheck.
Financial duress can make you more vulnerable to both employment scams and financial fraud. Be wary of promises that seem too good to be true, and use FINRA’s Scam Meter to check if a financial pitch carries some of the warning signs of fraud. Visit finra.org to learn more about investing and protecting your money.
