Let’s talk about financial hardships because once in a while, a financial hardship will happen. They can occur from job loss or a difficult financial situation.
In this post, I’ll discuss what to do when a financial hardship strikes, including ways to cut your expenses immediately and protect yourself from future hardships.
What is a Financial Hardship?
Financial hardships come in a variety of forms. Some examples of financial hardships include:
- You lose your job: When you lose your job, you likely lose a significant portion of your income. This can make it harder to pay bills. You may also lose your benefits, including affordable health insurance.
- You have to empty your emergency fund for an unexpected expense: In this example of a financial hardship, consider an expense that costs you your emergency fund, such as a hospital bill. A more out-of-the-box example is if a close family member passes away, and you spend money taking time off from work and making travel arrangements, such as airfare and hotel, to attend the funeral.
- You get injured: Perhaps you get injured and have to take time off from work and incur recovery expenses such as physical therapy. The combination of temporary income loss and added expense could cause you to incur a financial hardship.
Regardless of the reason for your hardship, remember that you will get through it.
Financial Hardships are Temporary
First things first: Financial hardships are temporary. No matter what’s going on, no matter how bad it seems, remember to tell yourself that it will pass.
By staying focused and collected, you will be able to work through the hardship quicker and more confidently. Let me give an example from my own life.
In 2012, I left my high paying software engineering job in order to start a business. My wife had a job, so we didn’t think anything of it, and I was really miserable at my current job.
Two weeks after I left my job, my wife got laid off. We panicked. We suddenly had no income, and my business idea suddenly no longer seemed viable. This led to many months of hardship, where we depleted much of our emergency fund.
- Do These 10 Things to Handle Being Laid Off From Work
- Your Emergency Fund: Are You Saving Enough?
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We employed much of what you’ll read about further in this post, and by late 2013, we were back on our feet and moving again.
1. Go on a Spending Freeze
When you lose your job or have any other financial hardship, consider going on a spending freeze as soon as possible. This means you stop buying everything except absolute necessities (paying your bills and the minimum payments on your credit cards). Then you go for as long as possible without spending a penny. Do this for as long as you can, even if just for a week.
By not spending money for a duration, you’ll have money at the end of the month that you may not normally have.
If you believe the financial hardship will last for some time, cancel all of your subscriptions and memberships to products and services that you can do without for the duration of the hardship.
2. Cut Back on Everything
Whether you create a budget for your hardship or not, you need to cut back on everything possible. You want to squeeze every last penny out of your budget until your financial situation improves.
Related Post: Your Detailed Guide for Creating A Budget
That means canceling memberships and subscriptions. It means stop going out to eat and cut out the $5 coffee. Anything you don’t need, stop spending money on. If you believe your situation might last some time, you’ll want to call service providers and lower your monthly payments.
Even after your financial hardship passes, re-evaluate if you needed to spend money on things you were in the first place. Perhaps you will find some ways to save that you hadn’t thought of up until now.
3. Use Your Emergency Fund if Needed
Most Americans don’t have $1,000 to their name, and that’s scary! The average emergency fund should be between three and six months worth of living expenses. I go over this in this related post about emergency funds.
When in a financial hardship, you may have to dip into your emergency fund. Remember, this is what it’s there for. Take as little as you can from your fund to cover necessary expenses in this time of need.
Once the financial hardship has passed, replenish your emergency fund as fast as possible. If you don’t have an emergency fund, open an online savings account right now and start one.
4. Update Your Budget
If you haven’t already created a budget, now’s the perfect time to do so. If you already have a budget, make a copy of it and use your copy as a budget for your financial hardship. Begin removing everything you don’t need and cutting back on everything you can’t remove.
Related Post: Your Detailed Guide for Creating A Budget
Do you have a deficit? Determine how many days, weeks, or months that you can last on your savings based on your budget. Continue to cut back until you can weather the storm. Budget while having low or no income.
If you have a lot of debt, you may want to develop a modified repayment plan with your creditors. This is important because if you are late on payments, or miss them entirely, your credit score will be negatively impacted.
5. Use Your Time Wisely
During a financial hardship, you need to maximize how well you use your time. Did you just get laid off or lose your income some other way? Did an emergency expense happen? Did you lose all of your income?
One thing you can do is get a side hustle, even if temporarily. Through a side hustle, you can earn extra money to alleviate your situation.
During a financial hardship, you can consider using your time to learn new skills, which will lead to better employment or more money from your side hustle. Three such places to learn new skills is Udemy, Skillshare, and LinkedIn Learning.
To prevent yourself from future hardships, it helps to have multiple sources of income, a perfect reason to have a side hustle, or to build passive income streams.
6. Get a Side Hustle
Speak of side hustles, even having a once-a-week side hustle, can help you make more money and buff up your emergency fund. Once your emergency fund is sufficient, consider investing in an IRA for retirement. I talk about what you need to know about IRAs in this post.
Don’t have time to get a side hustle? Learn to build passive income. It may be slow and minor at first, but given time, passive income can add up and get you in a better financial place.
Wrapping It Up
Financial hardships are awful, and they do sneak up sometimes. The best thing you can do is be prepared ahead of the time; that is, be proactive instead of reactive.
The key ways of doing this are by having an emergency fund by opening a high-yield savings account, having extra income via a side hustle or passive income streams, and maintaining a budget.
Did you go through a financial hardship recently? What did you do to get through it and get back on your feet?