Coping with a Financial Crunch

The economy is in a crunch. Rising fuel costs and natural disasters are causing price increases in critical consumer goods, like food, which rely on shipping. Credit card companies are reducing credit limits, withholding new offers of credit and raising interest rates.

The fall in the mortgage and real estate markets have eroded a much of the equity held by property owners leaving many to face foreclosure and even bankruptcy because they’ve used equity to pay off other debts and now that equity is gone.
Many Americans find themselves caught unawares by financial crisis. Yet, even during times of economic downturn, most financial crises are not only predictable but preventable.

The biggest reason we fail to see a financial crisis coming is mostly because we are too afraid to look in the first place. Experts have been predicting all of the current financial difficulties for years, even while we were in the housing market boom. We didn’t want to hear it. We would just rather not think about it until we are forced to do so. It’s like walking across a familiar street with out paying attention to traffic. You might get away with it for a while but sooner or later…
While working as Director of Education at Consumer Credit Counseling Service in Los Angeles, I dealt with literally thousands of people who steadfastly refused to look at their financial condition until they were forced to do so. Now the economy is forcing all of us to take a long hard look.

It is not too late! The key to preventing or minimizing real damage during financial stress is to understand your situation and take prompt action to control it.

Know your income. Take a good look at your net income. How much cold hard cash do you have coming every month? Consider all reliable sources. This is what you have to work with.

Consider your resources. You should have a financial cushion, three to six months living expensive in an account that is easily converted to cash. Savings accounts, mature savings bonds, money market accounts, certificates of deposit that are nearing maturity are all good choices. The numbers in your 401K plan may look enticing but really these should be a last resort. You’ll pay high penalties and taxes for early withdrawal and you may irreparably jeopardize your retirement.

Look at the way you use credit. Are you using credit cards to artificially supplement your income? Would you have enough money every month if you didn’t have your credit cards? Credit should be used less frequently during times of financial stress.

Know your expenses. Expenses are traditionally divided into three groups. Fixed expenses stay the same each month. Variable expenses change from month to month. Periodic expenses occur reliably but less frequently than every month.

Rethink your wants and your needs. So much of what we consider essential to our comfort and lifestyle is really fluff. Cutting back expenses in small ways can have a dramatic impact on your bottom line.

Prioritize your obligations. At the top of the list, place legal obligations like child-support, back taxes and court-mandated payments. Next are secured debt payments like mortgage or car payments. And at the bottom of the list, is your unsecured debt mostly in the form of credit cards.

Know your alternatives. The media is now rife with advertisements for debt solution companies offering debt settlement, debt consolidation, debt management, tax negotiation and even bankruptcy. Each company, even if it is “non-profit,” will probably tout its particular service and solution as the best for your circumstances and will effectively sell you on it if you call. Most consumers are unaware of the differences between these solutions, much less the corresponding expense and long-term consequences they carry.

The sooner you act, the less likely you are to suffer long term damage from an economic downturn. Arm yourself with knowledge and preparation and you’ll come out on top.