Emerging unscathed from a financial contingency

Mar 04 2014, 09:48 IST
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SummaryA sudden change in the financial situation can be extremely stressful.

Have you ever seen an unexpected financial emergency? It could have been a sudden job loss, unexpected medical expenses, urgent repairs at home, and the like. A sudden change in the financial situation can be extremely stressful.

Assess the scenario. Instead of running around in panic, carefully evaluate the situation. First, determine what caused the financial emergency. Before you look at ways to resolve the situation, understand the cause. Is it a sudden loss of income and mounting expenses you cannot keep up with? Though all situations can result in a similar burden, your plan needs to address the root of the problem.

Prioritise expenses. All expenses are not equal ó there are certain that need to be paid before others. The most important items that should feature at the top of your list are food and shelter. Carefully examine all your expenses and determine which are the most important ones. Then, look at expenses that can be curtailed. Though it is difficult to curb expenses on things you are used to, it is necessary to prevent yourself from slipping into an even deeper financial trouble.

Discuss with bankers. If you have skipped the monthly instalments of your credit card, car loan or home loan, the first thing you should do is call your lender. Calling bankers who issued the credit card or provided the home or car loan may fetch you lower interest or, in some cases, even lead to temporary waiver on repayment. They may even offer to make payments affordable if you are experiencing hardship. Do not wait for threatening phone calls and letters from banks.

Look for additional money. Ideally, you should have earmarked some money for emergencies to pay for unexpected expenses, but this is not always possible. Where do you turn to now? Well, borrowing money can provide quick access to liquid cash, but that comes with high interest rates and a new monthly outgo. If you experience financial hardship for a long period, you may find yourself in a downward spiral that is nearly impossible to recover from.

Another option is to check with friends and relatives. No one likes to ask for money, but a little help from friends and relatives will help you get through the rough patch. Of course, this option can put a strain on relationships, so proceed with caution.

You may also have some money available in retirement accounts. In the normal course of business, withdrawing money from retirement accounts is a bad idea as it can put your retirement security in jeopardy. But it might be enough to keep you from sliding deeper into financial trouble.

To conclude, if you have made it through difficult times in the past and wish to minimise the impact in the near future, you need to do certain things. Create an emergency fund equal to a few monthsí of expenses and keep it in a separate bank account. Make insurance a safety net to cover expenses related to medical and other contingencies. If you have a well-designed plan before a financial emergency strikes, it will lighten your load a great deal.

The writer is associate professor in finance and accounting,

IIM Shillong

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