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!