Summary
Ten key steps you can take to help in the event of a financial crunch or crisis are as follows. Information about each step is noted in the other sections of this article.
Step 2. Examine your income.
Step 3. Examine your expenses.
Step 5. Create a payment plan for your unsecured debt.
Step 8. Consider selling assets, including personal property or perhaps even your residence.
Step 10. If nothing else works, consider starting a bankruptcy proceeding.
Step 1. Create a Net Worth Statement and a Cash Flow Statement.
Together, a net worth statement and a cash flow statement provide a snapshot of your finances - your assets, debts, income and expenses.
Creating a financial snapshot starts with gathering information. Getting this snapshot doesn't have to take a lot of time because ballpark numbers can be used. To learn what is needed, see: Financial Snapshot: Gathering The Information You Need To Create.
For information about creating a cash flow statement, click here. For information about creating a net worth statement, click here.
NOTE: It's worth taking a few minutes to check to see if you are owed money, or if you have assets, you may have forgotten about. See How To Find Missing Money
Step 2. Examine your income
If you work:
- Look at what we call your "Real Earnings" -- how much you really earn when you add up all the time really involved in your work and all the expense involved. The odds are you will find ways to decrease your expense, and possibly free up time for other pursuits -- including earning extra money.
- Is there another job you can do for your same employer that pays better? You can't be discriminated against because of your health condition. See: How To Increase Your Income If You Are Working
- Would a job for a different employer earn you more?
- You cannot be discriminated against when seeking a new job.
- How To Review Benefits From Your Current Employer Before You Agree To Change Jobs
Consider taking a part time job.
- The internet has opened up an array of jobs that can be done part time.
- To learn more about potential part time jobs, and about letting your full time employer know about the job, see: Part Time Jobs . You can Work From Home.
Do you qualify for an income because of disability?
- Perhaps you qualify for Social Security Disability Income or Supplemental Security Insurance.
- If you have Disability Insurance, or your employer has a disability program, can you qualify for it? If so, see Disability Insurance: The Claims Process
- Do you qualify for a veterans income?
If you are not working, see:
Look at your investments and bank accounts.
- Is the money in a bank account earning the maximum while still remaining safe?
- Is your mutual fund investment still earning you the same rate of return it once did?
- Consider Borrowing Against Certificates Of Deposit Or Other Term Bank Accounts
- If you have a retirement account, can you borrow against it, or perhaps withdraw money (with or without a penalty)?
- For additional information, see: Investments 101: An Overview
If you own your residence:
- consider renting a room to travelers
- consider renting part or all of your home
Financial assistance may be available for your health care costs or at least the health care costs of your children. There is assistance available for a variety of needs, including help to pay for insurance premiums, including Medicare premiums, co-pays and deductibles. See: Financial Assistance
Step 3. Examine your expenses.
- Check your medical expenditures to see if they can be decreased or if there is money you are leaving on the table. For instance:
- If you have health insurance, that you are maximizing use of it. See How To Maximize Use Of Your Health Insurance.
- If you do not have insurance, that you are getting the care you need at the least cost. See: Uninsured.
- That you are minimizing your health care expenses. For instance, see:
- Drugs: How To Save Money When Buying Or Using
- Health Care: How To Save Money
- How To Negotiate A Doctor's Bill
- How To Negotiate For A Lower Health Care Bill
- How To Save Money In A Hospital
- Medical Bills: How To Save Money (after receiving a medical bill)
- Medical Tourism (saving money by traveling to get medical care)
- Tax Advantaged Health Savings Plans (including getting money out of)
- Check to see if you are leaving money on the table. For instance, see: Financial Assistance Check to see if you qualify for government benefits at www.benefits.gov
- Explore whether you can consolidate all or most of your debt into one loan, including switching credit card debt to a card with no or low interest. Consolidation can lower the amount of interest you pay on outstanding debt. (How To Consolidate Your Debt)
- Create a budget to help keep spending in line.
- The perspective you can gain just from creating a budget usually makes the process worthwhile.
- If you use it to help guide future spending, all the better.
- To learn how to create a budget, see: Budget: Creating/Living With
- Divide your expenses according to their importance:
- Essential -- Core expenses
- Discretionary expenses
- Unnecessary
- Starting with the most unnecessary expenses first, eliminate expenses you don't need in your life.
- Start with your largest expenses, particularly those that happen all the time. For example, check your property and casualty insurance policies such as your Homeowners/Renters and Automobile policies. There may be some that you don't need, or that you can reduce the premium by doing such things as increasing the deductible.
- If you need a medical procedure and will have to pay a substantial amount of money yourself, consider having it outside the U.S. in an accredited hospital. Going outside the U.S. for medical care is known as "Medical Tourism." (We have extensive information about "Medical Tourism").
- As you have time, work your way down to your smaller expenses. A daily latte at $5.00, 5 days a week for 52 weeks adds up to $1,300 per year.
- It's important to keep a few "luxuries" in your life that make you feel good. Just figure out how to do them less expensively. For example, instead of eating out three nights a week, eat out once -- or at a less expensive restaurant.
Look at your taxes. Perhaps there are deductions or other means of reducing your taxes that you are missing. Reducing taxes by $1.00 is even better than earning $1.00. For information see: Taxes.
If you are part of an economic unit, think in terms of the entire unit. Get everyone together and discuss what everyone can do on their own to relieve your financial pressure.
- Look independently at their expenses to see if you can come up with ideas of your own.
- Create ground rules for your economic unit -- such as who spend how much on what. Agree not to question what the person spends so long as within their budgeted amount. If everyone knows their job, it will relieve tensions.
- If you need someone to assist you for a while, instead of hiring expensive help, could a family member take advantage of an FMLA leave to care for you? The person may lose income, so do the math.
Consider:
Step 4. If after eliminating your non-essential expenses, you still have more outlay than income, prioritize your debts.
When you are in a financial bind, it is helpful to divide your debts into essential and non-essential. An essential debt is one that will impact your health and security if service is interrupted.
Once debts are divided this way, priorities can also be established within each category according to what will hurt the most if it's not paid.
Following are some guidelines to help you determine what is essential and what is non-essential in your life:
Essential Debts
- Debts relating to essentials for a life, include the following:
- Food. Think in terms of what is necessary, not what you've become used to. The equivalent of a lobster dinner is not essential (though you may want to do one every now and again for your mental well being.)
- Necessary medical expenses, including health insurance premiums.
- Rent or mortgage. Real estate taxes can be postponed, but not for long.
- Utilities: Heat in the winter is essential. Air conditioning in the summer may or may not be. Minimum payments should keep the service running.
- Medical care if you continue to receive necessary treatment from the provider.
- Car payments if necessary for your job or health care. Do not let your car insurance lapse. It's not only against the law in some states, but you risk what you have left plus future income.
- Child support has to be paid or you risk going to jail.
- Unpaid taxes. Rather than risk having the IRS take your paycheck or other property, work out a repayment plan. You have a right to get a repayment plan if you owe less than $10,000 and you have never defaulted on an agreement with the IRS.
- Debt that should objectively considered to be essential. For example:
- Whether or not the debt is backed by collateral: Will you lose something tangible (like furniture) if you don't pay the debt? If so, is what you would lose something you could do without? How would this affect your family's health and security?
- The amount of equity you have in something: If you are paying off a car that's currently worth $15,000 and you owe only $2,000, you probably don't want to risk losing it. On the other hand, if you owe $4,500 on a deep-freezer worth $5,000 you won't be losing as much financially if you stopped making payments and it's repossessed.
Non Essential
- Prioritize non-essential debts by the rate of interest, impact on your credit rating and other consequences.
- The rate of interest you pay on the debt: All else being equal, you'll want to pay your higher-interest debts off first. You'll pay less interest in the long run. If you're not in danger of losing personal property or real estate, keeping interest to a minimum may be your top consideration.
- Impact on your credit rating: Poor handling of student loans is reported to credit bureaus, but being behind on student loans may not damage your credit rating as much as poor management of other debt such as credit cards, automobile loans, or a mortgage.
- Other consequences: For example:
- Student loans are subject to special collection remedies, including special wage garnishment (taking of your wages.)
- At the other extreme, if you owe money to friends and family, they are likely to understand and not push for debt repayment if you tell them about your health and financial situation.
- Debt that has an emotional kick when you get the bill each month.
Step 5. Create a payment plan for your unsecured debt.
Think of your finances in terms of a business situation. You are the Chief Executive Officer.
- Pay expenses according to what works for you, not your creditors.
- Do your best to keep emotion out of it.
Look at the consequences of not paying each debt on time. Consider holding off payment on those debts with the least consequence.
- For example, if you do not pay your rent or mortgage, you may lose your residence.
- Perhaps you can afford to lose your automobile if public transportation is available.
Now divide up the amount of money you have available and create a payment plan.
To help in making decisions, we provide information about prioritizing expenses that may help guide you in creating your payment plan. For instance, we provide information about housing and food.
Keep in mind that there is not much, if any, negotiating room with respect to secured debt (debt for which a house or other real or personal property is pledged to secure repayment).
NOTE: To determine the number of months it will take you to pay off a particular debt, use a free calculator such as the one available at www.bankrate.com Click on "Credit Card Payoff Calculator."
Step 6. Renegotiate as much of your debt as you can according to your plan
Consider negotiating a reduction in the amount due. See: How To Negotiate With Creditors
When it comes to credit card companies, if you saved the offers for new credit cards you likely received in the mail, you can use the rates offered in those mailers to help negotiate against your current credit card companies.
If you make an agreement with creditors, keep to whatever you agree. If something unforeseeable happens and you cannot keep your agreements, let your creditors know before you skip a payment.
If you need help negotiating debt, consider using a Credit Counseling Service, a lawyer or a financial planner. If you do use a credit counseling service, watch for non-profit scams. There are good non-profits - but there are also some that have been known to scam. For informaiton, see: Credit Counseling Service 101
Also see:
Step 7. If you still have a short fall, look for money including from loans against assets. Consider bartering
Following is a listing of sources to consider when in need of money.
- Through a loan. For instance:
- Use funds in a 401K or other retirement plan last. Although you pay interest to yourself, you lose the advantage of tax deferred earnings on the earnings you borrow. If you leave your job, you will likely have to repay the loan or owe taxes and penalties. For information about how to borrow from a retirement plan, click here.
- Review your other assets to determine if you can borrow against them, while still holding onto them. For instance:
- Borrow against personal property
- Borrow Against Certificates Of Deposit Or Other Term Bank Accounts
- Borrow against securities such as stocks and bonds
- Borrow against your residence as a Home Equity Loan or by refinancing your mortgage.
- From a current or former employer.
- Consider borrowing from a commercial financial institution such as a bank or savings and loan or a credit union.
- Think about borrowing from family or friends or from people you don't know online.
- Consider giving a fund raising party
- Borrowing against a life insurance policy.
- Against an expected refund.
- If you only need money for a very short period of time, and can pay it back quickly, consider a Payday Loan (Also known as Fast Loans, Online Loans and Fast Loans) or a Title loan (such as a loan secured by title to your vehicle)
- Through new uses of your home, such as:
- Renting a room to travelers
- Creating an apartment in a house that you can rent to others, or live in a part of the hosue and rent the rest of the house
- Turn your home into an assisted living facility.
- Selling your residence and leasing it back.
- If all else fails, sell it for the best price.
- Consider renting your personal property to others. For example, through:
- GetAround (connects car owners with people who want to rent cars).
- SnapGoods.com , (peer to peer lending site for tools, cameras and other items)
- US.Zilok.com (peer to peer lending site for anything)
- Through other fund raising ideas such as:
- If you can't work for an extended period of time, consider applying for Social Security Disability Income (SSDI) and Supplemental Secuirity Income (SSI). If you are eligible for SSI, you can get cash in a hurry.
- Sell personal property. For instance:
- Sell a life insurance policy
- Through financial assistance, Check to see if there is money available because ofyour particular health condition. For informaton, see Financial Assistance
Find out if you can barter by swapping services you can do for the services you need.
- You may be able to do this informally in your neighborhood, through your religious organization or other organization to which you belong.
- There may be a Time Bank which basically allows you to exchange services for other services in your area.
- There may also be a web site with a barter section or barter exchange that works for you. (See Bartering 101: On Your Own, Through Websites and Exchanges).
If your credit card offers convenience checks, use them sparingly, with knowledge about fees and interest rates and an understanding of the fees described in the fine print and the high amount of interest that will be charged once an introductory period is over. (For more about convenience checks, click here.
To Learn More
Related Articles
New Uses Of AssetsStep 8. As a last resort, sell assets - perhaps even your residence.
As you decide what to sell, keep in mind what assets may be exempt from bankruptcy.
When deciding what to sell, the emotional value to you of an item may be an important consideration. As a general matter, what you and your family need for a safe, health life are more important than sentiment.
For information about selling specific items or through the following means, click on following:
- A business
- Cemetary plot.
- Gold
- Items on line.
- Life insurance
- Personal property
- in general (including best what to sell what)
- On consignment
- At auction
- Real property
Step 9. If you need help through these steps, consult with a professional.
The following professionals can advise whether there are steps you can take that will help preserve some of your assets -- something that may get more difficult to do the lnger you wait.
- Financial planner. Be carewful when hiring a financial planner. Just about anyone can call him or herself a financial planner. Look for someone with the knowledge and experience you need. For information, see:
- Credit counseling service
- Credit counseling services can be free.
- When choosing a credit counseling service, watch for credit counseling scams.
- For information, see: Credit Counseling Services 101
Step 10. If nothing else works, consider starting a bankruptcy proceeding.
The concept of starting over through a bankruptcy proceeding is such a part of our culture that our founding fathers built it into the constitution.
A bankruptcy will stay on your credit record for 7 -- 10 years, depending on the type of bankruptcy you file.
See Bankruptcy to learn about the different types of bankruptcy and whether bankruptcy might be the right choice for you