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If you find yourself weathering a financial storm, there are small steps you can take to regain control of your situation.
In a recent poll from CNBC and Momentive, 70% of those polled said they were stressed about personal finances. About half said their stress has increased since before the beginning of the COVID-19 pandemic.
If that sounds like you and you find yourself weathering a financial storm, there are small steps you can take to regain control of your situation. Here are six tips for overcoming financial challenges you can start implementing today.
1. Identify your top financial problems
When money is tight, you first want to figure out why it’s tight. Is the issue a short-term problem or obligation — e.g., an unexpected car or home repair — or is it something long-term — e.g., student loans or ongoing health issues. Knowing how long you’ll be dealing with a specific financial burden will help you make plans to deal with that problem.
It could be, however, that problems aren’t external or environmental; they could be behavioral. Investopedia lists the following as the most common financial mistakes:
- Excessive and frivolous spending.
- Never-ending payments.
- Living on borrowed money.
- Buying a new car.
- Spending too much on your house.
- Using home equity like a piggy bank.
- Living paycheck to paycheck.
- Not investing in retirement.
- Paying off debt with savings.
- Not having a plan.
Once you’ve identified the external factors and personal behaviors contributing to your money woes, you’ll be better equipped to start making changes. And that begins with setting a budget.
2. Set a monthly budget
Pull out a piece of paper or open a spreadsheet: It’s time to write down your monthly cashflow:
- Start with your net income (i.e., your monthly paycheck after taxes and deductions).
- Next, write down all of your monthly expenses.
- Divide your expenses into two categories:
- Needs: Mortgage/rent, utilities, food, etc.
- Wants: Entertainment, gifts, etc.
Once you know where all your money is going, you can build your budget. The ideal budget follows the 50/30/20 rule:
- 50% on needs
- 30% on wants
- 20% on savings and debt repayment
That being said, when you’re in the midst of financial hardship, the 50/30/20 rule may not be immediately attainable. For example, your needs may require more than half of your income, requiring you to spend less on wants and savings. Still, it gives you something to work toward.
3. Cut expenses
This may seem obvious, but cutting expenses is much easier once you’ve sat down and built out your budget. Once you’ve identified all of your expenses, you’ll be able to recognize which expenses are necessary and which can get tossed — temporarily or permanently, depending on their nature.
For example, while going over your monthly expenses, maybe you’ll uncover forgotten subscriptions that are chipping away at your bank account. There are many ways to find these subscriptions, from checking your Android or Apple store logs to using a subscription-tracking tool.
4. Start an emergency fund
A worrying 22% of U.S. adults have no emergency savings, and 30% who do don’t have enough to cover three months. Still, as the adage goes, the best time to plant a tree was 30 years ago, and the second-best time is today.
If you’re just starting out, start small. Set aside enough money from your “wants” spending to cover a single bill — maybe $200 to $300. As time goes by, keep adding to that fund. Ideally, you’ll eventually have enough to cover up to six months of expenses.
5. Know which debt to cut first
Look, no one likes debt. There’s nothing like the feeling of coming out from underneath an enormous burden. Unfortunately, the majority of us can’t eliminate all of our debt in a single blow. When you’re in debt to multiple entities or for varied loans (e.g., mortgage, student loans, credit card debt, etc.), you’ll have to prioritize your debt payments. Bankrate identifies five strategies, but let’s touch on two for now:
1. Pay off the highest-interest debt first.
With high-interest debts, minimizing your monthly payments might only go toward paying off the interest, leaving the actual debt untouched. Prioritizing these debts and paying more than the minimum payment will ultimately save you money in the long run.
2. Pay off the smallest debt first.
For those who struggle with making payments at all, paying off the small debts first can be good for boosting your morale. It will cost more in the long run, but the psychological benefits are nothing to scoff at.
6. Take advantage of third-party help
To be clear, we’re not saying you should run to a payday loan office when facing financial challenges. You’ll be hard pressed to find an advisor who’d ever recommend going to these extremely high-interest, predatory loans.
Instead, we recommend that you reach out to those organizations in the area that are dedicated to alleviating poverty and helping those in tough financial situations lift themselves up. For example, Community Action Services and Food Bank (CASFB) is a local nonprofit that “provides a two-step process to solving poverty: first, to provide the resources to help stabilize the person’s crisis, and then to help them rebuild their life.” In addition to food emergency assistance, CASFB provides preventative help in the form of financial learning, homebuyer classes and groups/mentoring to help individuals and families improve their situations over time.
Storms pass — even the financial ones. Follow this advice — identify your top issues, set a budget, cut your expenses, start an emergency fund, know which debt to cut and reach out for help — and you’ll be better equipped to weather the storm.
Sam Wright is a project manager at Stage Marketing, a full-service content marketing agency based in Pleasant Grove.
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