Tip Content Provided By: Financial Finesse
Murphy’s Law is that anything that can go wrong will go wrong. I used to laugh when I heard this until Murphy and his entire family decided to park themselves in my life. In about a 3 month period, we experienced a dramatic drop in income, had a head-on collision and wrecked our other car. (If you read my other posts, Murphy seems to sit on top of our cars).
The accident sent me to the ER and resulted in weeks of physical therapy. Our heating and air systems went out in our homes a few weeks later. It seemed like there was a permanent rain cloud over our family that we could not get out of – but we did. It was not easy, but the steps we took early in the process made everything smoother.
Accept our new reality. As crazy as it sounds, the first step was accepting that our finances had changed. Even after the drop in income, we still spent as if we had our full salaries. This just got us deeper into debt.
Create a budget based on our new income with a focus on the essentials. As we started filling in budget categories, we first focused on the categories that were essential – food, shelter and transportation. Next, we focused on the things that we considered important but would not cause us to be homeless, starving or jobless –Internet service (if your work from home, ask about being reimbursed for Internet services), cell phones, credit card bills, student loans, etc. At the bottom was entertainment, travel, and eating out.
Contact our creditors BEFORE we had problems paying our bills. I cannot overstate that the most important thing to do during a crisis is to communicate. Talking to our creditors – the mortgage, student loan and credit card companies – created a record.
I learned later that the record was two folds. One is that we stated we had a crisis in advance and the second is that we are committed to paying our bills on time and will work with our creditors. You will also know which department to call and the process for getting help if you cannot pay.
Eventually, we got to a point where we could not pay all of our bills. When we called, we knew to call the hardship department, state our situation, explain our budget and ask for help. We were able to get help from all the creditors we contacted. If you are facing a financial crisis, even if can currently pay your bills, consider contacting your creditors to inform them of your circumstances. We learned the earlier you contact them, the more likely they are to work with you.
Start slashing our expenses. I will admit, drastically reducing our expenses felt like the Band-Aid dilemma of our childhoods. Do we take it off quickly or slowly? No matter what you choose, it will hurt so just do it quickly.
The same goes with expenses. Just start slashing. We completely got rid of cable, went to a cheaper cell phone plan, cut out all eating out and got rid of our gym memberships. I listened to just about every YouTube video on healthy eating on a budget and we cut our grocery bill in half.
We did a staycation instead of traveling. Our kids still say it was one of their favorite vacations. We became Craiglist and Ebay pros and started selling stuff around the house we did not use anyway (old, unused wedding gifts and toys were our first targets) as well as taking the kids’ old clothes and toys to consignment shops.
When things stabilize, do not make up for lost spending time. When your life returns to normal, do not immediately start adding expenses. We learned our lesson about the importance of having some money set aside for emergencies so the first thing we did was to build a small emergency fund of about $1,000.
Then we used calculators like the Debtblaster calculator to come up with a strategy to get rid of the debt. It took a few years, but we were able to pay off all of our debts. The key for us was to keep our frugal lifestyle until the debts were paid. As our incomes went up, we did not increase our lifestyle so in a weird way, our financial crisis led us to getting out of debt.
The biggest takeaway we got from our experience is to never assume your financial situation will not change. We are all one car accident, layoff or family emergency away from a crisis. Living below your means, paying off high interest credit debt and having an emergency fund are the greatest barriers to keep Murphy and his family from becoming uninvited guests in your life.