How to Deal With a Financial Emergency

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Unexpected financial emergencies can easily leave someone feeling blindsided and helpless. Whether it’s a job loss, medical expenses, or an emergency home repair, the sudden change in your financial situation can be incredibly stressful.

No matter how stressful the situation, bills still need to be paid, lights need to stay on, and food needs to be on the table. If you've recently been struck by a financial emergency, there are steps you can take to cope while reducing the negative economic impact.

Evaluate the Situation

As soon as you realize a financial emergency has struck, take a moment to sit down and carefully evaluate your situation. Running around in a panic won’t solve anything and it only adds stress. A little bit of panic is understandable—you probably have a million things running through your head and remaining calm isn't one of them. However, the ability to check your emotions and carefully evaluate your situation at this crucial point will ensure you make the right choices and avoid further hardship.

Once you've calmed down, try to determine the root cause of this financial emergency. You will brainstorm solutions eventually, but first, you need to understand what caused this to happen. Is it a sudden loss of income? Mounting expenses you can’t keep up with? A natural disaster? While each situation can lead to similar crises, your plan of attack needs to address the root of the problem, or else it'll just be putting a Band-Aid on a wound that's bound to open again in the future.

Prioritize Expenses

Not all expenses are created equal. Some bills need to be paid before others, and if you can't afford to pay them all, you need to prioritize. The most important bills are the ones related to food and shelter. Letting your internet service lapse is inconvenient, but it's easier to find a coffee shop with free wifi than it is to find a new place to live, so mortgage and rent payments should take priority. You won't think as clearly or work as productively on an empty stomach. If you start skipping meals, you may be digging yourself deeper into your crisis.

Once you’ve established which bills are the most important, you can begin looking for expenses to cut back or cut out your budget altogether. This won't be a fun process, but the cutbacks will expedite your recovery.

Think about those premium movie channels or streaming services. Maybe you can get by without an expensive cell phone plan, or maybe you can eliminate your landline. If you regularly go out to eat, consider cutting back or eating at home entirely. You don't have to look for major cuts. Small savings can add up. If you find just five ways to save $20 each month, you’ve instantly freed up $100, and over a year, you'll have saved $1,200. That money can go a long way in addressing your financial emergency.

Negotiate With Lenders

If you’re having trouble with credit cards, medical bills, or mortgage payments, call your lender as soon as possible. Believe it or not, it’s in their best interest to help you make your payments. They'd rather get some money than none at all, even if it means giving you a lower interest rate or extending your terms. A common mistake is to wait until you're severely delinquent before contacting lenders, and by then they won't be as willing to work with you. If you know that money is getting tight and you might need help, call them before you get behind on payments.

You may be surprised at how willing lenders will be to work with you. Your credit card company may be willing to lower interest rates, and in some cases, it may even temporarily delay payment requirements. Reaching out to your mortgage company can lead to a restructuring of your loan. Utility companies often offer programs to help keep the lights on and make payments affordable during times of sudden hardship. But all these options are a lot less likely to be on the table if you wait to act until threatening letters start showing up in the mail.

Find Extra Money

Ideally, you want to have some money set aside in an emergency fund to help pay for any unexpected expenses, but this isn’t always a realistic expectation. So where do you turn when you’ve tapped your savings account?

You can always try to get a loan or use credit cards, but these may only make the problem worse. While borrowing money can provide quick access to cash, it can also come with high-interest rates and a new monthly payment. These extra payments will extend the timeline of your financial hardship, and if you borrow too much money, you may find yourself in a downward spiral that is nearly impossible to recover from.

Another option could be to check with friends and family. Nobody likes to ask for money, but a little bit of help from a loved one might be all that you need to get through the rough patch. Of course, this can also put a strain on some relationships, so proceed with caution.

And finally, you may have some money available through investments or retirement accounts. Generally speaking, withdrawing money from your retirement accounts is a bad idea as it can put your retirement security in jeopardy. However, if borrowing the money through loans or credit cards would create an extended period of financial hardship, dipping into a retirement account could be your best option.

If you currently have a 401(k) or 403(b) where you work, check to see if they have a loan provision. If you take a loan from your account, you may be able to borrow funds without facing taxes and penalties (as long as you stick to the repayment plan). If a loan isn’t an option, you may also qualify for a hardship withdrawal or even a regular premature distribution.

Touching your retirement savings should be a last resort. Anything you withdraw will be taxed at a higher rate than it would be in your retirement years. If you’re younger than 59.5-years-old, most withdrawals from a retirement account come with an additional 10% penalty.

Take Advantage of Available Assistance

The government has created social programs designed specifically to help people overcome sudden financial hardships. In the event of a job loss, you may be entitled to unemployment benefits. If your job provided health insurance, make sure you look into COBRA to see if you can maintain affordable health insurance. If you were injured at work, ask about workers’ compensation. In some situations, you may even qualify for state or federal benefits like Medicaid or Social Security Disability.

Your taxes fund these programs, so make sure to take advantage of them if you need them and if you're eligible. If your hardship involves job loss, you may find helpful resources at your local community center. These centers commonly offer workshops and classes on subjects like resume writing, interviewing skills, and networking opportunities.

Planning for the Next Financial Emergency

Once you make it through your current hardship, take steps to minimize the impact of similar events in the future. Start with an emergency fund. A good rule of thumb is to have enough set aside to make ends meet for a few months. That way, unexpected expenses won't force you to make difficult choices about basic needs. Obviously, the more you have saved, the better off you’ll be, but don't get discouraged if you can't immediately reach your savings goals. Whatever you save up will buy you some time while you get things back on track.

You also want to consider insurance. Most forms of insurance are a safety net to cover unexpected expenses related to our cars, our homes, our health, and other aspects of our lives.

Having a plan in place before a financial crisis strikes will take a lot of weight off your shoulders. Know your expenses, have a few backup plans for how you’ll pay them, and it'll be that much easier to cope with your next stressful situation.