A financial emergencies is the result of your reaction to an event, not the event itself. If you aren’t prepared for financial adversity, and you don’t react appropriately, then you risk the event becoming a major hardship in your life.
For instance, if you were to get into a minor car accident, and you find yourself in need of $1,000 to cover the insurance deductible, then your preparedness for this situation dictates whether or not the accident qualifies as an emergency. And when individual emergencies start stacking up, you may find yourself in the midst of good ole financial disaster.
As horrific as financial disasters like bankruptcy, foreclosure and collections can be, they aren’t the end of the world. Well, they are the end of the world if you throw your hands up and quit. And to be completely honest, giving up is always an option. It’s a terrible option, but an option nonetheless. You can recover from any financial disaster, but it requires a focused effort, a shift in behavior and a shift in perspective.
If you find yourself in need of a disaster recovery plan, follow these three tips to make sure your decision to change is a permanent one.
1. Do everything differently. The worst thing you can possibly do is behave the way you have always behaved. Your past behavior led to a financial disaster. Frankly, a financial disaster is not the normal byproduct of financial diligence. Your decision-making and behavior must change. It’s quite possible that you buried a reasonable financial instinct years ago, after ignoring consistently for several years. You must let it loose.
2. Budget. You cannot, under any circumstance, have expenses that are greater than your income. This is what led you to the nasty money place. In fact, your expenses should only equal 90% of your take-home income. A financially responsible individual structures their financial life in such a way that 10% of their income goes directly toward a savings account. Once three months expenses are set aside, then that 10% of your income should flow toward longer-term investments.
Succinctly, your budget should look like this:
25% Mortgage or Rent
12% Groceries and Food
5% Holidays and Gifts
3. Shift your perspective on stability. Rewind your mind back to the time you were financially struggling—which, yes, might actually be right now. Now multiply your monthly expenses by three. For example, if your expenses are $2,500 per month, then multiplying by three would bring you to $7,500. That is the exact amount of money you need in a savings account.
Here’s what I know. You are probably dismissing that figure with a flippant, “Wouldn’t that be nice?” But you can’t think that way. It’s self-defeating. When you think “wouldn’t that be nice?” you’re letting yourself off the hook. When you learn that need $7,500 in an emergency fund, your first thought should be, “That’s what we need.” You need to put pressure on yourself to run after that goal, not alleviate pressure by classifying it as some sort of wacky pipe dream.
If you are at a crossroads, you need to make a decision as to what your future will be. A non-decision will result in accepting the choice to wallow in financial mediocrity forever. The keystone to disaster recovery is a purposeful decision to recover. Filing for bankruptcy isn’t a decision to change. While it might bring relief, it certainly doesn’t bring change.
Don’t trick yourself into thinking your financial disaster is over once the pressure subsides. Use your new breathing room to make a conscious decision to change.
Peter Dunn, aka Pete the Planner, is an award-winning financial mind who has authored 5 books, hosts the popular Pete the Planner radio show and travels around the country offering financial education. His signature wit will have you laughing as you learn. You can learn more about him at www.petetheplanner.com.