Sometimes catastrophe strikes and we end up in a financial crisis. From natural disasters, large-scale pay system errors, illnesses, or sweeping layoffs, Canadians can face major financial emergencies, leaving them suddenly without steady pay or on the hook for significant expenses.
Do you know what you would do if payday came up and you didn’t get paid, or if an emergency came up that you just couldn’t afford? It’s a stress-inducing situation, so you need to have a solid plan in place to kick into action. Here’s what to do before a financial crisis strikes.
Evaluate the Situation
Your first step in preparation is to remind yourself to stay calm and consider the emergency situation. Is it a one-time incident, such as not receiving your pay due to a payroll mistake, or is it a long-term issue such as a job loss, which could put you out of work for months? It’s also important to consider if it’s a situation you have control over, or one you have little or no control over.
Sometimes we are deep in the red because of losing our job, while in other instances a loved one could be sick, leading to steep medical expenses. In other prime examples, over the past few years, Canadian civil servants have been underpaid or not paid at all due to errors with the government’s rollout of the Phoenix pay system, In late 2018-2019 the American government shutdown meant its workers weren’t paid either.
The various predicaments have their own set of factors to keep in mind but ultimately each situation leads to a similar burden – you need to make ends meet during financial difficulty.
Build Up Your Emergency Fund
There’s a reason why certified debt counsellors, financial planners, and personal finance aficionados swear by building up an emergency fund – it’s because rainy days are inevitable, and you need to be ready for them.
Future-proof yourself by setting aside some savings for an emergency fund. A buffer of about three to six months of your monthly expenses is the rough estimate to aim for. If you don’t generate income and you’re cash-strapped, this account will be a lifesaver during times of need. The same goes for other life emergencies too, such as a leaky roof or car repairs. Remember to commit to only turning to this fund in case of true emergencies, and replenishing it as soon as you’re able to.
So how do you plan for unexpected expenses? You start an emergency fund for yourself. The easiest way is to factor it into your budget. Start small – even with only $20 if that’s what you can afford, set up an automatic transfer on pay day so that you don’t forget to put the money into the emergency savings account, and increase it as you are able to. You will thank yourself later!
Develop a Crisis Budget
Your crisis budget, which will detail your spending during a financial crisis or economic downturn, will guide you on how to rein in the expenses. It’s wise to develop this bare-bones budget before an emergency occurs so you’re making decisions with a clear head instead of in panic mode and scrapping everything.
Your crisis budget will trim the fat – maybe you were going to the movies every Friday, grabbing coffee to go before work, and buying takeout for the family during the week. Scaling back on (but not entirely eliminating) these spending categories during tough times will help you pull through without going into major debt.
When a financial emergency occurs, your purse strings are bound to tighten, so you’ll need to have a plan for how to buckle down on spending.
Look for Ways to Cut Back and Increase Your Income
While constructing your crisis budget, do a thorough skim of every line of expenses in your budget and ask yourself honestly if there is an opportunity to save. An interactive budgeting spreadsheet that juggles the numbers automatically can make it easier to end up with a budget that balances.
If you’ve lost your steady pay, could you forgo the satellite television package and the premium cell phone data plan? Could you rent out your spare room or downgrade your car to a more cost-efficient means of travel? It’s a hard exercise but it will help you stay afloat later on if circumstances take a turn.
Decreasing expenses is part of a crisis budget, but also look for any way to increase your income.
Get Familiar With Your Financial Accounts
In being proactive and pre-emptively avoiding financial disaster, get acquainted with all of the accounts in your financial household. It’s also vital to know what consequences you may face if you end up not able to repay what you owe.
For starters, take stock of all of your liquid assets tied to central banks, such as your chequing and savings accounts, RRSPs, and TFSAs. Will your investments be safe in the stock market during a tumultuous time with the financial markets? How quickly could you turn these accounts into cash in hand if you needed to, and would there be tax implications?
Evaluate housing prices too – your home is likely the biggest purchase you’ve made in your life so you need to keep an eye on the real estate market. The same goes for monitoring other asset prices, such as your car, jewellery, collectibles and other valuable possessions. In times of financial trouble, you may need to part with some of your belongings to have extra cash available.
On the other hand, tally up your debts. Do you have credit cards with higher interest rates and can you cope with making payments on these accounts if things go south? Understand your terms and conditions, along with the penalties you may incur for missing payments.
Be Prepared to Ask for Help
Depending on what may happen, you have many safeguards in place that may offer you some reprieve. For example, if you’re laid off at work, Employment Insurance (EI) could help you cover costs as you look for a new job. If your town is afflicted with a natural disaster or your health takes a turn, your home insurance and medical insurance could provide you with some benefits to help you stay the course.
It’s best to study the insurance policies that you have so that you’re aware of deductibles, coverage amounts, and other factors that come into play.
Another responsible step is to note the contact information of your banks and creditors. If you suddenly can’t keep up with regular payments, it’s worth calling them to notify them of the financial situation you’re grappling with. The sooner you contact them the more options they’ll have available to help you get back on your feet. However, resist entering into a revised payment agreement unless you are absolutely sure you can stick to it.
Seek Professional Help
Bracing yourself for the financial unknown during times of uncertainty is a daunting task – it’s completely appropriate to ask for professional help, and this aid comes in many forms. Accountants and financial planners, for example, know the ins-and-outs of penalties you could face from withdrawing from your retirement savings, or offer you tips on how to maximize the returns on your investments. If you’re juggling competing priorities like starting a slush fund while paying off debt, one of our professional Credit Counsellors is your best bet to help you chart the course to obtaining your goals.
How Our Credit Counsellors Will Help You Get Out of a Financial Crisis
If you’re already behind when disaster strikes, our Credit Counsellors are the experts to help you get back on track. They will have a look at your debts and walk you through your debt relief options, from debt management programs to debt consolidation loans, legal options, and other bankruptcy alternatives. If we aren’t the most suited professional to help you, we will recommend the type of professional service that can help you further. Our appointments are free, confidential, and you can talk to a Credit Counsellor in person or over the phone. You aren’t obligated to take any further action by speaking with the Counsellor and your meeting is a judgment-free zone. There are no hidden fees, fine print, or strings attached. Contact us now, all you’ve got to lose is your debt.