Six Tips to Help You Face Any Financial Crisis with a Robust Financial Plan
Financial planning is important for a number of reasons. It can help you achieve your long-term and short-term goals, help make your retirement financially secure, and reduce your tax liabilities. A robust financial plan can also help you with a money crisis. A money crisis or financial problem can strike anytime, completely unannounced, and disrupt your life. You may be forced to sell your assets and possessions and change your lifestyle significantly to accommodate the unprecedented cash outflow. However, there are some ways through which you can tackle these unforeseen financial issues.
A foolproof financial plan can help you evade most financial crises that may show up unannounced. A financial advisor can help you plan an effective strategy to become better prepared for financial crises. He can also help you stay afloat and not compromise with your long-term dreams to make way for short-term needs and requirements.
This article talks about some ways in which a robust financial plan can help you face any financial crisis in life.
How can a financial crisis be avoided with financial planning?
Under financial planning, multiple factors, such as tax planning, retirement planning, estate planning, etc. are taken into consideration to come up with a sound financial plan that suits your financial needs. Financial planning ensures that you never run out of funds in life, and the money you earn is able to beat inflation and offer adequate returns over time to cover all your expenses. A crucial aspect of financial planning is also to account for financial emergencies, such as home repairs, medical expenses, car damage, unemployment, etc. By planning for such unprecedented situations, you eliminate the need for debt. Financial planning helps you save for an unplanned future expense so that you do not have to borrow money from friends or family or take high interest loans to cover your expenditure.
It is impossible to predict what the future holds, but being prepared can offer you peace of mind and reduce your stress considerably. Financial experts recommend maintaining an emergency fund that can cover you up to 4 to 6 months without any other source of income.
How to avoid a financial crisis
Here are six ways that can help you avoid a financial crisis:
1. Make a budget:
Making a budget is the first thing you can do to ensure that you are managing your money through a structured approach. A budget helps you make note of all your income sources and expense heads, so you can prioritize which of your money habits are essential and what can be dispensed with. Most people do not even realize where their money goes. However, when you make a budget, you identify the places where you are spending your money. Budgeting refers to setting limits for each head. This helps you keep your spending in check. For instance, you can set aside 8% of your salary for your daily commute. This will ensure that you keep your expenditure in check and do not cross the limit unless absolutely necessary. If you find yourself spending more than the fixed limit, you can consider using a different mode of transport, like taking the subway instead of a taxi. Taxis can cost you thrice or more than a subway for a short ride. In the case of long distances, you can end up paying up to ten or twenty times the fare of a sub. This may not seem like a lot on a daily basis but can add to a significant amount when computed monthly.
Budgeting helps you pick less expensive options. And the money that you save by setting limits can be invested further for future use. These savings come in handy when you find yourself facing a money crisis later on in life.
2. Reduce your debt:
Debt is like rust on your savings. The high interest rates can rob you of your hard earned money as you end up paying back a lot more than what you borrowed initially. Credit cards have made it easier to cover different types of expenses these days, but they have also caused considerable harm for those looking to become financially disciplined. Credit card debt creates a never-ending cycle. You take on debt to cover your expenses. As your expenses increase, you tend to take on more debt. You get tangled in a web of unnecessary purchases and lose sight of your actual financial worth. Debt also reduces your credit score, which results in high interest loans later. If you ever find yourself in a real financial crisis and need to take a loan, you will be stuck with high interest loans due to a low credit score.
However, when you reduce your debt liabilities, you automatically save more money. The money that is wasted on paying high interest rates can be used on building up your savings for the future. For instance, if you invest your money in high-yielding bonds, you can earn an inflation-beating dividend in return. Hence, instead of creating outflows, try to create inflows of money.
3. Save more money:
As a rule of thumb, you can aim to save at least 20% of your monthly salary. 50% from the remaining portion can go towards your necessary expenses like rent, groceries, electricity, gas, etc., and 30% can go towards discretionary expenses like travel, dining out, etc. You can also save or invest more if possible, but your savings percentage should never ideally go below 20%. If you find it hard to save, you can set automatic savings on your bank account. Also, make sure to first save your money and then use the remaining portion for your monthly expenses and not the other way around.
4. Ensure to keep liquid savings:
While it is important to save, it is also crucial to save in accounts that let you access your money when you have a financial problem. For instance, retirement accounts like a 401(k) account or an Individual Retirement Account (IRA) can be great savings tools, but they are not flexible. If you make a withdrawal before the maturity date, you will be subjected to a penalty. Similarly, stocks can offer high returns, but they also require a well-calculated withdrawal strategy. If the market is experiencing fluctuations, you may suffer a loss if you were to liquidate your stocks unexpectedly. Hence, while it is good to add long-term savings vehicles like retirement accounts and high-risk stock investments to diversify your portfolio, you should use a highly liquid instrument to save for financial contingencies. Money market accounts, certificates of deposit (CDs), etc., can be ideal for this purpose as they offer security along with high liquidity and flexibility.
5. Buy adequate insurance:
Insurance plans are one of the best financial tools to ensure future financial security. Insurance can help you with a variety of needs. For instance, health insurance can be used to cover unexpected medical expenses. If you own a home, homeowners insurance can help you cover any loss caused to your home or its possessions. A disability cover can take care of expenses arising out of a disability, and lastly, a life insurance plan can offer your loved ones financial assistance in your absence. Insurance can be an effective tool against an unexpected money crisis. It can offer you and your loved ones peace of mind and help you save for a future need with affordable, systematic premiums. So, make sure to add insurance to your financial plan if you want to avoid any financial crisis in the future.
6. Increase your income sources:
The more income sources you have, the more you can save. If you have some spare time on your hands, you can try to earn more money by pursuing a hobby like writing, painting, singing, etc. You can work part-time as a tutor, freelance as a consultant, or help a friend with their business. Thanks to the Internet, you can now earn money from the comfort of your home without even having to step out of your bedroom. So, keep an eye out for work opportunities that can benefit you. You can also consider working overtime or asking for a raise at your job if possible.
How to handle a financial crisis
There is no specific way to handle a financial crisis, but being prepared can help you significantly. Also, keep in mind to not panic. A financial crisis can be a trying time in anybody’s life. But instead of making financial decisions in haste, try to think calmly and use the resources available to you more efficiently.
Financial planning and systematic savings can help you create a large corpus to meet your future needs. A robust financial plan can be used to cater to unanticipated needs that may crop up in the future. So, make sure to always save and invest for the future.
Adequate savings can help you tide over a storm without facing any major setbacks. So, regardless of your age or income, maintain an emergency fund with sufficient money for any kind of future money crisis that you may encounter.
If you need help in saving for unforeseen expenses or do not know how to handle a financial crisis, you can reach out to a professional financial advisor in your area for expert guidance.