Financial setbacks come in all shapes and sizes.
It can be an expensive household repair or major car trouble. It may be increases in your insurance plus a rent hike taking effect at the same time. Or, it can be something more extreme, like getting a pay cut at work- or even being given a pink slip. It may be a medical emergency that isn’t covered by insurance, or some good news that will cost you a bundle, like a wedding or the birth of a baby.
It’s impossible to plan for every financial hit you will take in your lifetime.
The question is: What are you going to do about it?
1.) Don’t panic
2.) Crunch the numbers
I’ll disappear if you just ignore me and pretend I don’t exist, said no problem – ever. That’s because problems won’t disappear when they’re ignored, especially not money problems. If anything, they snowball into a mountain of financial issues you really don’t want. So, difficult as it might be, sit down and figure out exactly how much more money you’ll need in order to cover your new expense, or to fill the gap of an income loss.
3.) Work twice as hard
When you’re dealing with a financial setback, you’re looking at less money than you need to get you through the month. The only way to stretch what you have to fit your needs is to earn more or to spend less. Since tightening your budget is almost always stressful, try to find ways to add to your income first. If possible, put in more hours at work or seek extra projects, even if it means working nights and/or weekends. Consider freelancing or consulting if you can. Take a side job for some extra cash. Do whatever it takes to bring in a little more money to cover the additional expenses.
If you’ve been laid off or your hours have been cut, it’s OK to work at a job that is below your skill level until you find something more permanent. There’s no shame in earning an honest living.
4.) Trim your spending
Now, it’s time to see which expenses you can trim. Before cutting your budget in half, though, take the time to prioritize. List all the expenses you cannot do without and the ones that would be irresponsible to neglect. Don’t skip mortgage payments or neglect your insurance premiums because you’re short a few hundred dollars. Instead, take an honest look at your remaining expenses and see where you can cut back.
If you’re careful, you may be able to cut your grocery bill in half. Trim spontaneous purchases by only using cash – and keep a minimal amount on you at all times. If you’re a two-car family, consider scaling back to one car for now. Push off your vacation plans until things start looking up. Do whatever you can to come up with the extra cash.
5.) Contact your creditors
If you absolutely cannot make some of your minimum monthly payments anymore, contact your creditors before they come calling on you. It’s always best to be up front about your financial situation. Most creditors will be happy to work out a reasonable payment plan with you.
6.) Reach out to family and friends
The people who care about us most are the ones who can get us through anything. Don’t be embarrassed to tell your family and friends what’s going on. They’ll support you and encourage you until you get back on your feet, and they may even be able to help you out with employment opportunities or helpful contacts.
7.) Be proactive
Hindsight is always 20/20. Harness the urgency you feel now to get into the habit of building up an emergency fund. As soon as you’re back on your feet, start putting away money that can be pulled out in future setbacks. Experts recommend that you have 3-6 months worth of living expenses saved up in case you can’t work for any reason. Knowing you have that money to fall back on will take the stress out of these situations.
Do you need help recovering from a financial crisis? Call, click, or stop by [credit union] today, for help with money management and ending the debt cycle.
What credit scores are: Three-digit numbers expressing the likelihood you’ll repay someone who lets you use their money (like a loan or credit card).
Who has a credit score: People who have been listed on an account that was reported to any of the three credit bureaus: Equifax, Experian and TransUnion. An account can be a student loan, car loan, credit card, credit-builder loan or maybe rent. It represents something you are obligated to pay.
Where the number comes from: Data is collected by the credit bureaus, which get the information from lenders, credit card issuers and public records. Then it is weighted to produce a score, typically on a 300 to 850 range. Higher is better. There are hundreds of scoring models, so most consumers have many credit scores.
How do I get started?
- If someone with good credit makes you an authorized user on an account that’s reported, that can help.
- Student loans and sometimes car loans can be relatively easy to qualify for.
- Credit-builder loans and secured credit cards are made for people building credit or re-establishing credit.
What should I do to boost my credit?
- Pay all bills on time, every time.
- Use your credit cards lightly — that is, don’t use more than 30% of your credit limit on any card.
- Keep old accounts open unless you have a good reason to close them (like high fees).
- Apply for credit sparingly.
- Consider having both installment (level monthly payments for a set period) and credit cards.
More from NerdWallet
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- How Much Debt Is Too Much?
- Add 100 Points to Your Credit Score