It’s a sad and sobering thought, but – it should be considered that some form of financial disaster is inevitable.
If financial disaster can’t be avoided, how do we at least minimize its effects?
Education is the key here. Educate yourself about financial matters as they apply to your circumstances. Everyone is different, so the strategies will be different for each person. Pertinent knowledge and prior planning will help you limit the long-lasting effect financial difficulties can have on you and your family.
Remember, we are to blame for the financial disasters in our lives. I know that sounds harsh, but it is the reality. Of course, we don’t do it on purpose, I know, it’s just that we often don’t realize what we have done until it’s too late and disaster strikes.
It’s often little things that compound over time, until one final straw breaks the financial camel’s back. It’s also little things, done every day, which can help us prevent these disasters and help us come out the other side, battered and bruised but still standing.
Let’s look at some of these strategies now.
Start an Emergency Fund
One of the biggest things you can do to help avoid disasters is to create an emergency fund. Try and start it off with a lump sum of a few hundred dollars and then allocate a set amount to go into it from every pay cheque. This is a reserve of money for emergencies; leave it alone and don’t go dipping into it for general spending. It’s not for paying bills, going on holidays or paying college fees; no matter how urgent these might be, they are not emergencies.
Try to build your emergency fund up to equal 6-12 months of income, so you can safely cover your living costs in the event of a financial disaster. Consider it insurance and don’t fret that it’s only earning measly interest in a savings account.
Speaking of insurance, this is another area that can help you avoid financial disaster. Insurance is protection against the unknown and is one of the most effective ways to shield yourself from financial ruin. Don’t consider the cost of the premiums; consider the cost of replacing your car, home, furniture, income etc. if you are not insured! Avoid the expensive, unnecessary insurances; stick to the basics for adequate cover for the major things in your life. Long-term disability insurance falls into this category; you need to be covered for 2-3 years of income to prevent losing everything you have worked hard for in the event of serious injury or illness.
Manage Your Debts
Managing your debts is a biggy when it comes to avoiding financial disaster. Spiraling debt is the biggest single cause of financial distress out there. Credit card debt remains at an all time high; this is the first debt to attack and get under control. Limit your exposure by aggressively attacking your credit card balances, focusing on one at a time. As each one is paid off, cut up the card and close the account. Resist taking on more debt when you are offered another card or a ‘free’ credit increase – there’s no way these are ‘free’! Keep just 1 or 2 cards for occasional use; leave them at home when you go shopping so you aren’t tempted to impulse buy.
As far as other loans go, do some research or consult a financial advisor about whether you have the best deal available. Change loan providers where necessary and allocate extra funds to getting loans paid off faster. You’ll save money in interest and reduce your liability if times get tough.
Have a Diverse Investment Portfolio
If you have investments, ensure that your portfolio is diversified. This way, even if one type of security loses value short-term, you will have others that will remain strong. Include various types of asset class like international stocks, commodities, global bonds and alternate investments. A diversified mutual fund is an excellent way to achieve a diversified portfolio.
Change Your Behaviour
It has been said that personal finance is 20% knowledge and 80% behavior. Learning how to handle money well is a vital strategy for avoiding financial disaster. There are a few classic money behaviors and habits that many people are guilty of. Read through this list and tick off any that apply to you.
– you just have to have the latest, the newest and the best
– you spend money to make you feel better
– you don’t have a budget
– you hide things you’ve bought from your partner
– you impulse buy
– you pay for everything with a credit card
– you have multiple credit cards
– you only ever pay the minimum repayment on your credit cards each month
– you seldom, if ever, review your financial position
– you have little in the way of savings
Be honest now- did any of these apply to you? If so, now is the time to review your knowledge, habits and behaviors around money and finances. Start to make small changes so that you will be in a better financial position; this will help you avoid financial disaster and experience a bright financial future.
So, have you ever been struck by financial disaster? What happened and how did you resolve it? Or, what strategies do you use to avoid financial disaster? I would love to hear.
IDK if I am convinced that financial disaster is inevitable. That is only because I consider financial problems on a hierarchy where “financial disaster” would be the worst. Few things qualify, but I share your sentiment that challenges with finances are frequent. Thanks for some awesome tips.
There is definitely a hierarchy. However disaster can be different from one person to the next. Different degrees can still mean the same thing to different people.
Just like most people preach, having an emergency fund can drastically reduce any effects of a financial disaster. It will allow you to keep paying all of your expense.
changing behavior is great advise. Too many people don’t change the way they approach things because at the moment they feel say. When the economy started to head south a few years ago I became much more frugal. This wasn’t entirely out of need but instead it was because I was thinking three steps ahead.
I am glad you thought three steps ahead. Your financial future is grateful. You are right though. Many people have a false sense of security and use it to shield them from reality and what they should be doing.
Twelve months, really? Oof then I have a ways to go. PS I didn’t know you were Canadian!
I think twelve months is reasonable. Even if you aren’t out of a job that long you still need a buffer before things balance out again.
Yes I am Canadian. Did you read that was recently? If so, where?
Behavior change is the biggest transformation you need to make to avoid financial disaster. Often we forget that our thoughts shape our actions — good or bad.
I agree. Behaviour change is often the answer to many of our problems, not just financial. It is also the hardest thing to change. It is not impossible though.
I have a credit card too. Don’t get me wrong they have a place. However a lot of people have too many and all it does is allow them to build up more debt. Closing cards doesn’t necessarily hurt your credit score. What hurts is not paying them on time.
I am with Roshawn on this one: financial problems, yes; disaster – could happen but would be very exceptional. The steps to avoid it still stand, though – particularly changing one’s habits. This is in the foundation of all else, I believe.
I agree. Habits and our behaviour are the root of everything. If we get those under control then we are well on our way.
Wow, I remember this – commenting on blogs!
Awesome article Miss T.
A point I wanted to make on the check list at the end. I pay for EVERYTHING I can with my rewards credit card. Everything (from a grocery store or gas station) goes on the MBNA Platnium Smart Card and the rest goes on the Capital One World Aspire. Great CASH rewards.
Of course, I pay the card off every month and have for as long as I have had these cards (years and years).
I guess this is where the 80% behavioural comes in – you can control some things in this list (others, not so much) if you are militant at ensuring you do not fail at other items in the list.
Hey SPF. Welcome back.
We do the same as you. We use our rewards for travel which saves us a ton.
And yes behaviour is the biggest influencer. We have control over our actions and not anything else so we mind as well make the most of that.
“It has been said that personal finance is 20% knowledge and 80% behavior.”
This is so true. People talk about what they are going to do all day long, but they rarely follow up. I have been questioned for hours by people who wanted to get started investing, but only a few ever do it.
Yup. What we do is much more important than what we say. We have to follow through or we will never get anywhere in life, including financially.