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5 Things to Do When A Financial Emergency Strikes

in Joan's Posts, Money Basics

bad-day-worries

Note: This is a post from Joan Otto, Man Vs. Debt community manager. Read more about Joan.

In the past few weeks, I’ve had a couple of friends hit significant, and totally unexpected, hard times financially. One friend’s husband lost his job with no warning. Another needed to buy a new car when his previous one, which still had a couple of years of payments owed on it, was totaled.

In both cases, these were totally “HOLY CRAP” moments. And while everyone involved in both cases is 100% fine physically, the stress that has resulted has been hard for me to watch as a friend. Imagine looking at two of the people you care about most in the world and hearing them both say, in effect, “I think I’m totally screwed. There’s just no way I can get through this.

That sucks. And me, well, I wish I was debt-free and had thousands of dollars to just give away to people who have sucky things happen to them, to be honest. But… you guys know that’s not the case. I prove it every month in my financial updates!

Unfortunately, all I have to offer my closest friends – and all my friends here in the Man Vs. Debt community – is some advice about how to start digging out when life tosses you in a huge hole.

So what do you do when financial disaster strikes?

1. Don’t panic.

I kind of hate starting with this, because it sounds super-trite, and I’d be ticked beyond words if someone told me not to panic if my car was totaled or if I was pretty sure I could no longer afford my rent.

And what I really mean isn’t that you shouldn’t freak out. It’s that you shouldn’t let panic make your choices for you.

The thing is, panic decisions are almost never good decisions. How many times have you done something desperate – because you were desperate – and then regretted it almost immediately?

Say you’ve got a Macbook Pro you paid $1,500 for. Your basement floods catastrophically, and that day, you freak out and take the Macbook to the pawn shop for some quick cash. That MIGHT seem like the right thing to do – but when done for the wrong reasons can make things way worse.

Selling your stuff is an awesome way to make extra cash when you need it. I’m a huge fan. But in most cases, I strongly, strongly recommend waiting a good 24 to 48 hours before you ship your wedding ring off to the pawn shop, put your house on the market or start investigating black-market organ sales options on eBay.

There are some generally well-known sayings about not making permanent decisions based on temporary feelings, and that’s pretty good advice. Don’t do anything you can’t take back – like selling any item that would be hard or impossible to replace – when  you’re most freaked out. When you do, sometimes you take one problem and create two in its place. You know, like having no car and no computer? No heat and no wedding ring?

So wait before you make any permanent decisions. But that’s not quite the same as not panicking at all. Try not to do that either. That’s where step two comes in…

2. Phone a friend.

When things go really bad, the temptation for a lot of us is to hole up and retreat. We hide in our houses, maybe accompanied by alcoholic beverages and comfort foods, and mope.

I am definitely not a “people person” even when I’m happy. I admit I like being alone. And if I’m sick, or upset, or worried? I hate having most people around.

This is a case, though, where I have to get over myself and do something I hate: Ask for help.

No matter how on top of things you are, you’re only one person. And when you DO have big decisions to make – changes to your housing situation, shopping for a car, selling big-ticket items – a second set of ears and eyes is invaluable to make sure you’re NOT doing something you’ll later regret.

If nothing else, knowing that there’s someone to keep you company while you do six hours of car-financing paperwork has got to count for something, right?

On top of that, we psychologically tend to make better decisions when we run them past someone else, even if that person doesn’t get a say, simply because the process of explaining our plan forces us to articulate our rationale clearly.

Moral support is awesome. And two heads are pretty much always better than one in a crisis. In this case, just make sure you pick the right friend, not one that will freak out even more than you already are. (See step one… no panicking!)

3. Figure out what’s essential.

This is where we come back to the selling-of-things and big-decisions mentality I mentioned in the first point. You might very well need to make some tough calls in a crisis, especially if you don’t have an emergency fund at all, or yours isn’t big enough to offset the expense you’re facing.

When you make decisions based on your real priorities and not fear, you put yourself in the best position moving forward. So how do you figure out what’s essential?

Well, for me, that pretty much centers around a roof over my head, food to eat, and anything I need to generate income. (In my case, that’s mostly a solid computer and internet service. If I worked an unwalkable distance from home, it might be a vehicle.) I’ve gone into this in detail in my advice for what to do if you’re behind in your bills; it’s all about prioritizing.

An emergency is also a chance to ask yourself the big questions.

  • Is it important that I own (or rent) my own home?
  • Is this a good time to consider getting a roommate – or becoming one?
  • Do I really need a car at all – or are there other transportation options I could consider?

These are huge questions and not topics that you just shake up for no reason. But if you’re looking at your budget and realizing that you need to come up with several hundred dollars every month for the foreseeable future, well, maybe you do need to sell that Macbook Pro and move in with friends.

The difference is priority.

If you’re selling your expensive laptop because you have a perfectly good desktop that you could do anything you need on, that’s probably smart. If you’re selling it because you’re panicking, but you don’t have a backup and you make part of your income online, well, that leads right to regret!

If you tell your landlord you’re moving out because you have a plan in place to stay with friends for a few months, pay down some debt and eventually get yourself a better place, that’s awesome. If you tell your landlord you’re moving out because you’re freaked out that you can’t make the rent, but you don’t really have anything else lined up, and then he rents your place to someone else, well, like I said, now you’ve got TWO problems: No money AND no home!

So decide what’s important – and work outward from there. Sell the things that aren’t. Make changes to your housing or car or work situation as appropriate, even big changes. But do it in line with your priorities!

4. Don’t bank on miracles.

This is also called “get real with yourself.” If your budget shows that you’re going to be $500 short this month, don’t say, “Well, I’ll just cut out coffees and I’m sure it’ll be fine.”

There’s optimism, and there’s “that’s not math.” Bet you can guess which that example is!

While helping one of my friends write his first-ever budget earlier this year, he realized he needed to cut back on things like eating dinners out. He didn’t like it when I pointed out that he’d then need to INCREASE his grocery spending – that he wasn’t just going to magically not have any costs for six meals a week.

He knew that – but, come on, that isn’t what we want to see when we’re trying to make things look better on paper. We often want to use magic math to cover up the real problems in our finances.

Then there are all the things that might happen, but that are somewhat or ENTIRELY outside our control.

  • Well, it’ll be fine, because I should certainly be able to find a job by next month.
  • I’m sure nothing else will go wrong with this car.
  • I can just make up for it by buying less stuff online. I’m sure my regular bills will work out.
  • It won’t matter if I’m late a couple times; I’ll get caught up as soon as my tax refund comes.

Being hopeful is fine. Planning your budget based on hope instead of math is not so fine. Budget based on reality, and let any unexpected good fortune be an added bonus, not an expectation.

5. Plan now for the next one.

This one really is more like a “step zero,” because really, this is what you need to do before a financial emergency happens, but we’ll wrap it around here at the end.

There’s a balance between the fatalistic and the realistic. I don’t advocate walking around afraid of what might happen all the time, but I do think it’s fair to say that things are going to come along that are really, truly bad.

Ice and curbs meet car axles and windshields to disastrous results. Refrigerators stop refrigerating. That heat that is supposed to come out of the gigantic heat pump in your basement turns into a steady stream of cold air. Bosses get mad and fire you. These things are awful – but they happen.

And when one of them does – and you get through it - it’s imperative that you figure out how to make the next one just slightly less awful.

If you got messed up by the insurance coverage on your (now-totaled) car, get exactly what you want when you get a policy on your new one.

If you lost boxes of irreplaceable family photos when the basement flooded, consider investing in some waterproof boxes for any remaining memorabilia.

And, of course, don’t forget that you might want to build up an emergency fund to help offset the costs of all these things!

It’s not an immediate fix, but if every time something bad happens, you make the next bad thing a little less awful, you really can change your life.

So what are your must-do steps when bad things happen? 

What advice would you give your friends in a crisis? And what would you want your friends to do for you in such a situation?

I’d love to hear your ideas in the comments!

{ 16 comments… read them below or add one }

Mary Ann January 20, 2014 at 11:43 AM

Great timing, my car just broke down yesterday. After I had a nice weekend of spending money I probably didn’t need to spend, now I’m stuck. I’m remaining calm, and had a small (not enough) emergency fund to help, but it again brings home the fact that it’s important to build up your emergency fund first, not pay extra on bills and buy things you don’t need just because you have a little extra cash this week. You never know when something bad will happen. My car will be fine, I’ll be fine, but I loved your advice about making the next bad thing slightly less awful, good tip!

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Joan Otto January 20, 2014 at 12:03 PM

Thanks, Mary Ann!! (And super-sorry to hear about your car; trust me, I know how that is!)

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Elaine January 20, 2014 at 12:17 PM

Item #2 on your list is not only good advice, it could be the very lifeline one needs in this situation. Perhaps one if your friends knows of a solution you hadn’t thought of. Imagine your car broke down and you learn that you could borrow one for a couple of weeks until you are able to find a more permanent solution. Or maybe a friend knows of a possible vacancy where you could move (job, housing, whatever your need is). Even if an immediate solution isn’t found such as I’ve described, network network network! It sucks to admit when we’re between a rock and a hard place. Sometimes SO HARD that we can’t stand our own company. But open your mouth the more you verbalized your situation, the less power it will have over you. (This worked for me when my ex committed suicide. I started with the truth, with my closest confidants. It took away enough of the stigma that I was able to deal with reality of not just being a single parent but an only parent.) I will caution you, though, to not make your bad situation into a badge of honor. The pendulum can and does swing. Be good to yourself and let others do the same.

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Joan Otto January 20, 2014 at 3:33 PM

Elaine, those are EXCELLENT points. I really should have mentioned the tangible, practical help friends can provide too. For instance, one of my friends does not have a checking account, but had to pay for a couple unexpected expenses by check because the amount was higher than he could easily get a money order for. He gave me the cash, I wrote the check. No harm to me – but a tangible benefit I was able to provide! And then when you get into truly tough situations like you mention, there is definitely the mental benefit as well, deeply so!!

I am so glad you were willing to share that with us, and so sorry to know you’ve gone through that. The reminder to be good to ourselves is invaluable!

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Elaine January 20, 2014 at 12:19 PM

Sorry about the typos. Using my iPhone’s tiny screen!

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Ian January 20, 2014 at 1:28 PM

Great article. My work got extra slow starting in December and my expenses have been greater than my income since December. I saved for this which is good because winters are generally slow doing organic gardening and landscape maintenance in the pacific northwest, but when the work slowed down and some recent estimates haven’t taken hold yet, I freaked out and lost my center which snowballed the effect. And in this place when you are self employed your prospects and clients are off put when you come at them like that and not centered in your service.

I’m planning today to make a budget for this year and figure out ways I can reach my goal of 50,000 gross income this year.

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Joan Otto January 20, 2014 at 3:35 PM

Ian, GOOD FOR YOU on making that budget. I hope you’ll let us know how it goes – and I think you hit a key point regarding the value of staying centered especially when you’re portraying your business to the public, you know? That is so important!

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Ian January 20, 2014 at 4:03 PM

Thanks Joan. I’ll follow back up yes and it’s harder when you are a rut for sure. I’m reaching out for coaching/mentoring as well to get some support. I do find I always do better when I have professional support and I’ve hit a point where I know I need some help.

Thanks again for the awesome blog!

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Christina January 21, 2014 at 12:29 AM

This post is unbelievably timely.
Last week, my husband lost his job in senior management, after 32 years with the same firm. It is a wrongful dismissal case, and will likely wind up in court. He is about to turn 60, and the lawyer says it could take 2 years to collect severance. He could go to court, be awarded severance, and then the owner declare bankruptcy, so never collect. And my husband would be left with a huge legal bill. Also, my husband’s income represents 80% of our household income. Unemployment would only replace 40% of his current income, for one year.
It’s one week since the news. I called a real estate agent today. We can manage for about 4 months, but beyond that, unless something happens, the money will run out. We could sell the house, pay off our debts, and have about $250k left from the sale. I am thinking of renting, in case he gets a job far away. Or, we could rent out our house, and use the rental income to pay the remaining mortgage, which wouldn’t take more than three years. We could rent an apartment, and this would keep our costs down

I think the most frightening thing is moving to a place where we know no one, and having to make new friends to replace the relationships we’ve left behind. Also, we would leave behind an amazing street with terrific neighbours – the most friendly neighbourhood we’ve ever had.
I am doing my best to not left myself get overwhelmed, so I can still think clearly. I know that will be the biggest challenge in the weeks and months to come.

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Joan Otto January 25, 2014 at 12:23 PM

Christina, WHOA. I just saw your comment now and I am thinking of you guys… I am so relieved to know you’ve already gotten a plan in place to start dealing with everything. I know it’s not easy… especially, as you mentioned, not being overwhelmed by the scope of all that might change. Please keep us updated. We’re here for you… and I am just glad to know you’re hanging in there. Thank you for being willing to be open and share your story with us!

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William Cowie January 22, 2014 at 12:55 PM

Plan now for the next one – very important. Here’s one everyone will be facing soon: the next recession. Alarmist? Check out the math:

Economic cycles last 7-10 years, bottom to bottom or top to top. The downturn usually happens about 2 years before the bottom. That means the downturn usually starts 5-8 years from the previous bottom.

The last bottom came in 2009. When is 5 years from then? It’s now. Will we have a downturn this year? Probably not. But it’s not as far off as you might have hoped.

Like Joan says: plan now for the next one.

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Dwight Anthony January 22, 2014 at 10:18 PM

Great timing here Joan,
Really what a lot of people need to hear. Best to sleep on something and make a more rash decision in the morning instead of something you could regret for a long time.

Dwight Anthony
Financially Elite Blog

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Joan Otto January 25, 2014 at 12:23 PM

Thanks, Dwight! I am convinced that there are VERY few situations that require truly immediate action (obviously, fires and the like require a fast response!) but otherwise, YES, sleep on it! :)

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Alex January 23, 2014 at 1:20 AM

These are all great pieces of advice.

Everything on my car broke at once 2 years ago ($1950+tax), and I did the complete opposite of each tip. It drug everything out and made it all even more painful. #4 is SO important, you have to be honest with yourself, grit your teeth, and figure out a plan.

Luckily, I took the advice you laid about planning for the next one, and when a $1700 car repair came up in July of 2013, I was prepared and pulled it right out of the allocated fund. If you’re always looking down the road, it’s much harder for a deer to jump out in front of you and set you off course.

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Joan Otto January 25, 2014 at 12:26 PM

Alex, I have TOTALLY been there in regard to “doing the complete opposite” of every one of these. Bad decisions? HECK YEAH. Not planning for next one? Why would I do that? The list is almost endless.

But I’m so glad you changed the pattern with your car repair last year – THAT is amazing and exactly what I hope for everyone who reads MvD… that each time one of us gets “hit,” we’re a little better able to respond!

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Amanda April 24, 2014 at 10:56 AM

I like what you said about not panicking and selling things without thinking it through. I’m a huge fan of selling off things you don’t like or use, but it’s easy to go overboard when things feel out of control.

When an emergency hits, I break out the lists and the excel spreadsheets, and brainstorm different options. But I try not to act on those options without thinking them through for a few days.

These days my budget has three pieces in it: Needs, Priorities, and Wants. If I see a potential problem, or need to rebuild my Emergency funs, I cut out the Wants ($40/month for books/craft supplies/etc) in my Budget.

If something goes very wrong, like I lose my job, I can cut out the Priorities section as well, with no thought required. That section is mostly made up of cumulative accounts anyway, so I will still have the already accumulated funds there if I need them (Vet visits, clothing, activities for the kids, cable, irregular expenses, retirement savings).

The Emergency fund helps a lot too. There’s nothing more motivating to save up an Emergency Fund than not having one when you needed it!

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