Financial Planning: 5 tips for handling unexpected expenses

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Published: May 21, 2019 6:58:29 AM

Once the essentials such as shelter and food are covered, look to cut back on non-essential expenses wherever possible. Perhaps a few months away from Amazon Prime or Netflix would not be too bad if it means you are free from this new financial burden

A medical emergency or job loss can leave you strapped for cash. Here’s how you can be ready for any financial emergency (Illustration: SHYAM Kumar Prasad)A medical emergency or job loss can leave you strapped for cash. Here’s how you can be ready for any financial emergency (Illustration: SHYAM Kumar Prasad)

Sometimes an unexpected expense can leave you strapped for cash. It can be a medical emergency, sudden job loss, major repair work on car, urgent renovation on house, etc., can happen at any moment. Sudden change in finances can be cause for panic: Provisions, electricity and other utilities bills still need to be paid for.

Check out below some of the scientific methods that can help you when you are in a trouble.

Reach out and ask for help
Managing financial emergency alone could lead you to too many restless nights, so ask for help instead. Reach out to your friends and relatives and tell them your current situation and seek financial help with an assurance that you will repay when things become alright. You can talk to your bankers and creditors and explain them your current position. Believe it or not, it is actually in their best interests to help you meet your payments, even if this means paying a higher interest rate over an extended period of credit.

Encash your investments
Encashing your investment instruments during emergency is not an ideal means of obtaining cash. But if you are facing an emergency situation and you have the resources available, then they may be your best option. Just be careful. If you have investment in bonds, fixed deposit, you may have to pay penalties in the form of reduced interest rates, etc. Look at your investments, identify and sell only those instruments in which you may incur less loss.

Cover emergency expenses with a low interest loan
When you are short on funds and an one-time unexpected expense is lined up, probably a low interest personal loan can help you out. When you avail such loans, you determine how much money you need to borrow, and the banker uses your credit score and history to decide if you qualify for a personal loan and at what interest rate. If you have a fairly good credit history and score, availing a personal loan at a cheaper interest rate is relatively easier than that of any other type of similar loans. But please note that you should have a solid plan in place to service the same either monthly or quarterly.

Dispose of things not in use
Invariably, we all own some things which we never use. Why not sell them? Post an advertisement on the appropriate and relevant websites that host such sale. You may surprise yourself with how much money you can raise by disposing those items. In this process, as a bonus you clear the clutter in your house apartment. Of course, how much you raise depends on what kind of items are put up on sale and it may take a little more time, so you need to find a reliable website for such sale.

Prioritise your spending
Financial emergency is the best time to revisit and revise your budget. Identify, assess and prioritise your spending ranging from your dish television, magazine, newspaper subscription to your rent, utilities bill, etc. Make a list of all your current expenses and rank them from highest to lowest priority.

Remember, not all expenses are treated equal as money is likely to get tight, so be as stringent as you can. Once the essentials such as shelter and food are covered, look to cut back on non-essential expenses wherever possible. Perhaps a few months away from Amazon Prime or Netflix would not be too bad if it means you are free from this new financial burden.

To conclude, no one can avoid unexpected expenses, but you can be as prepared as possible to handle the same through the above tips and techniques.

The writer is a professor of finance & accounting, IIM Tiruchirappalli

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