Dealing with the unexpected: Best ways to avoid a financial nightmare

A surprise in your life every once in a while can be nice – a bunch of flowers unexpectedly delivered to brighten your day, or the news that management are off on a corporate retreat and the office is closed for a long weekend. However, there are unexpected surprises you would rather not have arrive on your doorstep such as a monster power bill after a particularly frosty winter, or the news that the corporate retreat was actually about budget cuts and you’ll only be needed – and paid – for four days a week from now on. While there is no way to truly expect these unexpected financial challenges because they could come in so many different forms, you can make sure your finances are strong and healthy at all times, and able to fight off these surprises successfully.

How to Deal with Unexpected Financial Surprises

Of course, if one or more of these nasty financial surprises visits you before you are fully prepared, there are ways to deal with the situation to stop it becoming a nightmare. There are three simple steps you can take if an unexpected financial disaster strikes your family:

1 – Review your options

As with any disaster situation it is important to remain calm. No matter how bad the situation seems, you can make it much worse if you make a hasty decision without carefully considering your options. Instead, think about what will be the best long term solution, rather than opting for a short term bandage option like a payday loan, which can solve the problem now, but will create a new problem down the track when you need to pay for that solution.

2 – Prioritise expenses

In deciding how to manage the financial situation, you should prioritise your expenses because some of your bills will be more important and more pressing than others. For example, your grocery and home loan or rent payments should be at the top of your list to be paid first even in a time of financial crisis so as not to jeopardise your food and shelter.

When you have prioritised your expenses, look at bills which you can do away with completely and while it can be hard to give up your luxuries, making a small sacrifice now can prevent you from having to make the ultimate sacrifice when your mortgage or car loan is in default. This is when you will need to look carefully at your bills and determine which ones are really a necessity.

For example, your cable bill and four week hair appointment can probably wait in favour of the power bill, and this also gives you some perspective to review your budget and spending habits once the crisis has passed. You may not need to cut out luxuries all together, and can instead cut back, for example choose a cheaper cable package or eat out just once a month instead of once a week.

3 – Negotiate with your creditors

In most cases, if you explain your situation to a lender or service provider, they will be able to extend the due date of your bills and waive any late fees – it is generally more cost effective for them to wait until you can afford to pay, rather than sending in a collections agency who will take a portion of the payment amount.

Also try and negotiate before you get too far behind, or behind at all as you will have a better chance of negotiating a payment plan as you have shown initiative and responsibility. In the case of your mortgage, you may also take the opportunity to restructure your home loan with a lower interest rate or a longer term for lower repayments. Even the power company may tell you you are eligible for an affordability program to keep your power connected even if you are experiencing financial hardship.

How to be Prepared for Unexpected Financial Surprises

Of course preparation is the best defence against unwanted financial surprises, and with these three steps you don’t need to know exactly what is coming, all you need to know is that you can handle whatever it is, with:

1 – An emergency fund

Saving for a rainy day is all a good way to start an emergency fund, but an unwanted financial surprise can come in any weather and you need to take a structured approach to building your savings. Work out how much you will need to cover between three and six month’s worth of expenses. You may want to aim to save more if you are self employed, if both you and your partner work for the same company, or only one partner works outside of the home as you can be more exposed to financial upsets.

Make contributions to your emergency savings fund directly from your pay so that you are paying yourself first, into your savings, and you won’t even miss the contribution. Keep your emergency fund in a high interest, fee free savings account to make sure every dollar keeps on working hard for you.

With an emergency fund you don’t have to resort to a credit card when an unexpected financial surprise comes up, and you can avoid the high interest and compounding interest of credit, and the new crisis it can create in the future.

2 – A working budget

To be prepared for unexpected financial issues, you need to know what is going on with your finances right now and you can do this by creating a detailed working budget. Enter your income and deduct your expenses, your savings contributions and your luxury purchases.

You should have some funds left over, but chances are you will have highlighted the mistake which invites financial surprises into our lives, and that is – you were living beyond your means, spending more than you earned. Therefore, look at where you can cut back on your luxuries until you have built up your savings and learned to live within your means.

Your budget should then track all of your purchases and give you a running total so you know at any time how much you can afford to spend in a month on items not on your budget list. You’ll also know whether you are sticking to the budget, or whether there are areas where you need more self control.

3 – Information

Since many financial crises can be of your own making, knowing everything which is happening in your financial life can be a strong defence against unwanted surprises. When you know when your bills are due you are prepared and they are not an unexpected expense you haven’t budgeted for. If you know when direct debits are coming out of your account, you don’t overdraw the account and attract overdraft fees.

If you know that your children have a camp at the end of the year, you know you need to save up, and you know that Christmas comes at the same time every year, so you can be prepared, rather than stretched financially.

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

I Need A Personal Loan There are more borrowers and fewer lenders today. You should always use the most trustworthy loans broker whenever you are thinking : ?I need a personal loan.? Remember too that expert advice can make all the difference to your financial situation.

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