If you find yourself in the midst of a financial crisis, rest assured that you are not alone. There are hundreds of men and women out there who are, either consciously or unconsciously, in the throes of a financial crisis. What exactly triggers a financial crisis? Actually, the reasons could be manifold. You may have lost your job and that may have put an enormous strain on your finances. You may have embarked on your own business venture and the investments and the uncertainties may be taking a toll on your finances. It is also likely that some medical emergencies have set you back and proved to be a drain on your resources. In fact, one of the common reasons why people get into a financial crisis is taking on too much debt and living beyond their means.
That is why it is so important to cut your coat according to your cloth. But that is very simple and easy to understand in retrospect. A financial crisis cannot be understood through the rear view mirror. The big challenge is to look ahead and more importantly to action a realistic and workable plan. Here are 7 key steps how to get out of a personal financial crisis:
Create a personal balance sheet.
That is the first step. Make a complete and transparent balance sheet of your finances. See how much of assets you actually have and what is the market value of these assets. Secondly, check your actual loan liability. Then classify the loans into high-cost loans and low-cost loans. Also what are the other sources of funds like the loans you have given, your share in ancestral property etc. that you can leverage on. When you put all these things together you have a reliable balance sheet in your hand. This actually tells you how much you owe and how much you own. You can then get a clear picture of how much of the debt can be serviced and how much cannot be serviced. This is the first step to getting out of your financial crisis.
Prioritize your goals and allocate accordingly.
Having made your personal balance sheet, the next step is to prioritize your goals. There may be some immediate goals and some distant goals. Focus on your immediate requirements like your medical necessities and your home loan EMI etc. These are your top priorities and other expenses can be subservient to these needs. Once you prioritize you will be able to add up your balance sheet with your monthly flows and arrive at a credible allocation plan.
Clear your high cost debts first.
You have gotten into a financial crisis because your current flows are not sufficient to service your debt. You first need to focus on your high cost debt. What are the high cost debts that you have? Obviously, your credit cards and personal loans will be classic examples of high cost debt. When you use your money to close your credit card, you are actually saving an annual debt cost of 35%. That is equivalent to earning 35% on your investments. That is surely money well spent. To the extent possible let your home loan continue as it is a real asset and also offers tax benefits on you.
Negotiate with banks and other lenders.
This is a measure you need to use carefully. You can negotiate with your banks for an interim moratorium on EMI payments. If the situation gets a little more serious, you can also negotiate with the banks for a one-time settlement of your debt. You must use this measure little carefully as it negatively impacts your credit rating and could impact your chances of getting loans in future. Use the settlement route only if you are absolutely desperate and find yourself in dire straits. Otherwise, it is best avoided in the interest of your credit history.
Convert your annuity plans to low cost term plans.
If you have an endowment policy where you are paying ₹20,000 a year for a cover of ₹10 lakhs, you can surrender that policy and convert it into a term policy of a higher amount. After 6-7 years you can recover your entire investment as the surrender value is calculated on the premium paid and the bonuses accrued. The premium payable on a term policy will be substantially lesser and your total risk cover will not be impacted at the same time leaving you with a surplus to allocate elsewhere.
Let your household budget reflect your financial situation.
Yes, that is very important. You cannot continue to live a lavish lifestyle and hope to get out of a financial crisis. You need to sharply cut down on your budgets. Dining outside, spending on expensive apparel and shoes and spending on jewelry can all wait for now! If you continue splurging money then you are unlikely to ever get out of your financial mess. Your budget should actually reflect the fact that you are in the midst of a financial crisis and desperate to extricate yourself.
Look at alternate sources of income.
This may appear to be trivial but it is all about putting your time and skills to good use. When you have spare time and additional skills as well put it to use. See if your spouse can also contribute to the household kitty. These may not be too large but will go a long way in helping you get over your financial problems.
Remember, getting out of a financial crisis is not just financial but also a mental and psychological effort. It begins by accepting and admitting that you are in a financial mess. Above all, it is very important that you keep your physical and mental health in good shape.
Angel BEE helps you to map out your income and expenditure by creating a balance sheet, which will help you to cut your unnecessary spending. We also help you to prioritize your goals properly to clear off your debts first and help you to create a secondary source of income to ensure that your future goals are not compromised as well.