Just about everyone knows what it’s like to experience unexpected expenses, and it can be disorienting. In fact, AARP reports that around 25% of adults feel financially unstable after being hit with unexpected expenses.
Financial problems can hit hard. But no matter how big the setback, it can’t determine your entire future. It’s just a single moment in time that requires a strategy rather than panic. By focusing on solutions, you can create powerful momentum, which will help you regain control.
First, stabilize your cash flow
When money gets tight for any reason, don’t start randomly cutting your expenses without a plan. You need to regain control of where your money goes, but it needs to be done strategically. One of the most efficient ways to do this is to tackle your biggest recurring costs. For instance, you might want to consider refinancing your mortgage to reduce your monthly payments.
According to Home Connect, borrowers who refinance can lower their interest rates, extend their terms, or consolidate equity to lower their monthly costs. This is an excellent way to stabilize your cash flow and get extra breathing room each month. You can then redirect those funds toward emergency accounts, paying off debt, or other critical needs.
Another option is to use debt consolidation
If you have any high-interest loans or credit cards, you’re probably paying way too much every month. Debt consolidation will take all of these balances and roll them into one regular payment while reducing the overall amount you owe. Debt consolidation companies negotiate with lenders to get them to accept a lump sum to consider your account paid off. They pay off each debt they’re able to successfully negotiate and charge you a set monthly fee – including their service fee – until you pay off the balance.
Be careful with personal loans
In some cases, it makes sense to take out a personal loan, but only when the consequences are serious. Don’t take out a loan for anything that isn’t ultimately necessary. Don’t go into debt to pay off old debts, either.
Rebuild your credit as soon as possible
It’s never too early to start rebuilding your credit. Even if your financial hit hasn’t impacted your report or score yet, start planning now. If your credit has already taken a hit, start repairing it as soon as possible. The better your score, the more leverage you’ll have to negotiate and refinance in the future.
Start by setting up automated minimum payments for all of your accounts to build a strong payment history. Next, look at your credit utilization ratio and start paying down accounts over 30%. Reducing these balances will support you more than you may realize.
Most importantly, if you find any errors on your credit report, don’t wait to dispute them. Many people see their scores rise after fixing inaccuracies.
Rework your budget
This may sound obvious, but it needs to be said. A budget created during smooth times won’t work in a financial storm. Revisit your budget and adjust it so it makes more sense and works with your current situation.
Categorize all your bills into needs, wants, and nice-to-haves. This will give you immediate clarity about what to cut first. It will also keep you from reacting by cutting everything. This organized approach will help you bounce back emotionally as well as financially.
Once you have a new budget and your priorities are set, start building a micro emergency fund. It doesn’t matter if you can only save $10 or $100. Start with whatever you can and make a contribution with every paycheck. This will give you the psychological feeling of security while building up an emergency fund. It may not be much now, but it will grow with time.
Create new streams of cash flow (even if they’re small)
Financial setbacks often require adding new streams of revenue in addition to cutting unnecessary expenses. But they don’t need to be huge. Even small income sources can make a big difference.
Start by leveraging skills you already possess, like cooking, troubleshooting, writing, or graphic design. You probably have at least one profitable skill. It’s just a matter of marketing yourself to find people who need your services.
Act strategically, not reactively
Financial setbacks can make you feel stuck, but it’s just an illusion. With the right strategies, you can overcome any unexpected expense, repair your credit, and rebuild your financial stability.