Tips for surviving a financial shortfall
It can happen to the best of us. A sudden emergency or a bad alignment of due dates and wham! A pile up of bills and not enough money to pay them. Here’s how to manage cash flow and avoid money shortages in the future.
With debts piling up, take immediate action to cut expenses, boost income and deal with creditors to get through the crisis.
1. Readjust your spending now. Prepare a bare-bones budget for the next month. Cut out discretionary expenses—eating out, clothes, cable TV. Switch to a cheaper cell phone plan, walk instead of taking transit, hold off on getting your hair colored—cut anything you don’t absolutely need to survive. Use the money that you would normally spend in those categories to pay bills.
2. Reach out to creditors. If you are not able to meet your minimum payments, contact your creditors and explain your circumstances. They may work with you to attempt to lower your APR and monthly payments. The same goes for your landlord if you are a renter—it’s cheaper to give you a few weeks leeway than to look for a new tenant.
3. Make more money in the short term. Ask for extra hours at work or get a part-time or freelance job. Have a yard sale or sell gently used items online. If you can increase your income even for a few months, it can help you get out of debt.
4. Borrow from your retirement savings. Your employer may allow you to borrow money from your 401(k), up to 50% of your plan to a maximum of $50,000. The loan must be repaid in full within five years. Also, you can borrow from your IRA once each year per account. As long as you redeposit the money in your IRA within sixty days, no penalties or taxes are assessed. However, this should be your last option: If you cannot repay your retirement plans, your long-term financial security is undermined. In addition, failure to repay on time will have adverse tax consequences and reduce savings available in the future for retirement .
Save while you spend
Make the best use of your credit by switching to a card that offers cash back on purchases or rewards and services that match your needs.
If you’ve been through a cash flow crunch, you know it’s not something you want to repeat. And neither do your creditors, who may be less accommodating in the future. Here’s how to create more financial security.
1. Permanently reduce expenses. Your money shortfall taught you how to tighten your financial belt. Now instead of loosening it, keep up those money-saving habits.
2. Create a budget. It’s hard to know whether you’re living within your means if you never add up your expenditures. Record everything you buy for a month, review it to see where you can cut back, and allocate a sizeable chunk for savings (10-20%).
3. Build your emergency fund. As your new budget frees up some funds, take that money to start an emergency savings fund, with the goal of saving 3-6 months of living expenses. Put the money in a savings account you have limited access to. Now, if you’re ever in a cash crunch, you’ve got it covered.
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