It came out of the blue and without warning: a sudden financial blow that has left your budget in a shambles. Maybe you’ve been hit with a large unexpected expense like a hospital bill for a prolonged illness or maybe you’ve been laid off from your job.
Whatever the cause of your financial troubles, the first thing to do is to get a hold of yourself and think clearly about your situation. This is no time to panic. You’ll be reassured to know you’re not alone. Financial setbacks like the one you’re facing happen to people all the time – especially during difficult economic times.
You’ll also be happy to know, as the Financial Mentor website points out, that there are commonly accepted ways for recovering from a financial crisis. So to get back on your feet financially, here’s what you need to do:
Financial Disaster Recovery Step #1: Take stock of the damage
Before you can decide how to solve your financial problem, you’ve got to know how bad things are.
Your first task is to figure out exactly how far in the red you are. Financial advisers, like those at the University of Illinois Extension, suggest you create a net worth statement to help with this.
Basically, a net worth statement is a balance sheet for adding up your assets (your income and property) and your liabilities (your bills). If you’ve kept a regular budget, start with that. If not, write out a list of all the things you own, like a house, car, electronics, and such, along with their value.
Then list all the bills you have to pay, both short- and long-term. When you subtract your liabilities from your assets you’ll know where you stand.
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Recovery Step #2: Create a recovery plan
Armed with your personal financial assessment you can now draw up a plan for putting your financial household in order. This is where you formulate your recovery strategy. U.S. News & World Report says your first task should be to set a goal for your recovery. As the old saying goes: You can’t tell if you’ve arrived if you don’t have a destination in mind. So where do you want to be at the end of this process: Back where you were before disaster struck or in better shape than ever? Decide that now and then put your plan into action.
Recovery Step #3: Prioritize you bills
Depending on how big of a hole you’re in, you won’t be able to pay many of your debts and regular bills. You’ve got to decide which to pay now and which can wait. Credit.org suggests this order, starting with the bills you must pay right away:
3. Housing expenses (insurance, taxes, etc.)
4. Expenses for work (transportation, clothing, etc.)
5. Child support
7. Student loan payments
8. Phone bill
9. Cable/Satellite TV
10. Other unsecured debts (credit cards, medical bills, etc.)
11. Debts in collection
Recovery Step #4: Cut expenses
You should try to trim as much fat from your budget as possible, at least temporarily. Anything that could be considered a luxury, like eating out, travel, expensive gifts, and entertainment, probably needs to go until your budget has recovered. If you need to cut further, into day-to-day necessities, you could try some of the budget-slashing tips from the planners at Bankrate.com. They have a guide to cutting back called “5 big bills you can cut fast.” It covers utilities and gas, food and groceries, financial services, taxes, and insurance.
Recovery Step #5: Increase your income
If you’ve cut your expenses to the bone and find yourself still behind each month, you’ve got one alternative: find a way to take in more money. Finding a better paying position and taking a part-time job are two obvious ways of accomplishing this. You might have to take on more than one moonlighting job if your situation demands it. You can also sell whatever possessions you own that you can live without. Or you can sell items and downgrade to a less expensive model. People have used lots of different ways to raise money in a hurry. Daily Finance has a list of 25 techniques you might put to use.
Recovery Step# 6: Get help from a professional
If you find that your plan isn’t working as you hoped, you may need to seek some professional advice on reworking your finances. The problem is financial planning assistance can be expensive. There is an alternative though. Four non-profit groups – three financial planning organizations and the U.S. Conference of Mayors – are putting on a serious of Financial Planning Days this fall. At these events you can get free, one-on-one consultation with a financial planner. The events are in major cities across the country and the dates are listed on the event website.
Recovery Step #7: Avoid recovery scams
Along with financial professionals who are on the up-and-up, there are fraudulent companies and individuals out there who will try to make a buck off your financial problems, mostly by promising to repair get your quick fix for your credit scores. Here’s a guide to telling which are legit and which aren’t.
Recovery Step #8: Review and adjust your plan
Once you’ve got a plan in place, you’ve got one last task to accomplish. You’ll periodically need to evaluate your progress and adjust your tactics as circumstances require. Forbes magazine says this step is the place to “Review. Review. Review.” This step is an important part of any strategic plan and will help keep you motivated and vigilant as time passes and your sense of urgency wanes.
Even the worst financial crisis can come with a silver lining: The habits and discipline you learn as you put your recovery plan into action may not only help you get back on your feet, they may put you on the road to prosperity. And they may even help you avoid having to confront a financial disaster in the future, or at the least minimize its severity. But if you ever do have to confront a large financial setback again, with this plan in place you’ll know what to do and you’ll be able to start your recovery right away.