6 Steps To Take When Facing Financial Disaster

It would be nice if simply going to work every day meant you would, for the most part, avoid financial crises around every corner. However, when you have lived through the Great Recession, high unemployment rates and a pandemic, your long-term savings goals often give way to short-term survival.

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If the thought of going without one paycheck frightens you, here are some steps you should start taking today to avoid a financial disaster.

1. Assess Your Money Status

No matter your situation, knowing exactly where your money is coming and going is an important first step. You can start by taking an honest inventory of your current resources and listing your spending needs to get organized. Once you have a clear picture, create a plan of attack that includes prioritizing urgent expenses such as housing, food, utilities and transportation before others.

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2. Build Your Budget

Tracking your income and expenses in order to understand where your money goes and identify areas where you can cut back is important. Develop a budget that reflects your current resources and helps you plan your spending wisely. Knowing what to do with your newly organized money is paramount to avoiding financial disaster.

3. Start an Emergency Fund

Yes, the thought stashing away three to six months’ worth of living expenses in an emergency fund can be overwhelming — so start with a small amount. Even $20 from each paycheck is better than nothing, and then those small amounts add up.

Likewise, if you get a little windfall like a bonus or tax refund, allocate some of the money to an emergency fund. You could also try breaking your pay into percentages and use the 50/30/20 rule, which allocates 50% of your paycheck to needs, 30% to wants and 20% directly to savings. Eventually, you’ll have enough to see you through a financial rough patch.

4. Come Up With a Passive Income Stream

The gig economy is a great answer for those who could use some extra cash. Consider driving for Lyft or Uber, walking dogs for Wag or freelancing on Fiverr. Set up your side hustle now, and you’ll be able to quickly build up your savings.

5. Pay Off Your Credit Card Balances

Paying off high-interest credit cards is a win-win, as you’ll save by not paying all that interest, and you’ll have credit available if you need it for an emergency. Keep chipping away, with the eventual goal being to pay off those balances completely. The only thing worse than not being ready when financial disaster strikes is being in debt when one does.

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6. Cut Down Your Spending

Take a good look at your budget so you know what items are discretionary. Be ready to cut things that aren’t necessities and add that money to your emergency fund. Living paycheck to paycheck is nobody’s idea of the American dream, but like the Federal Reserve, practicing a little financial regulation by following these steps can help you overcome sudden pitfalls.

Karen Doyle contributed to the reporting for this article.

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