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| The Basics | How to cope with a cash crisis
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I find that money disasters tend to hit all at the same time, and it's always the worst possible moment. Here's how to assess your situation and get back on your feet.
By MP Dunleavey
Trouble comes in threes, they say. But when that trouble involves money, it often seems to come in calamity-ridden clusters.
The hot water heater breaks down, your laptop dies, the clutch has to be replaced, your sister decides to have her wedding on Oahu -- all in the same week that you get a friendly letter from the IRS explaining that you miscalculated your taxes in 1986, and they now own your house.
"It's almost biblical," says Ginita Wall, a financial planner in San Diego. "You feel like saying, 'Where are the locusts?'"
Fortunately, there are things you can do to appease the financial gods, restore your financial equilibrium -- and maybe even fend off future misfortune -- without making too many big sacrifices. Or burning a lot of smelly incense.
It's not just the money
No matter the size and scope of your setback, there's no way to avoid the fact that you have to deal with both the fiscal and the emotional fallout. Coping with both is essential to making a solid financial comeback.
Carol Kauffman, Ph.D., an instructor at Harvard Medical School and a financial empowerment coach, says a series of financial hits may not seem overwhelming when you consider each one separately -- it's the accumulated stress that takes a surprising toll. "Usually, when you're under incredible stress you become a more extreme version of yourself," she says. "If you tend to gloss over things, you will gloss over even more of them."
Ditto if you tend toward panic -- or retail therapy (like someone I know who writes this column). Try to be aware of your own worst habits, so they don't sabotage you further.
That's why it's important not to take action right away, Kauffman says. "Before you can manage your finances again, you have to manage your emotions. You need to regain your balance before you can make a plan."
If the situation demands that you act quickly, Kauffman strongly recommends seeking the advice of a debt counselor, money coach or financial planner -- or even a financially savvy friend or family member who can help you get a clearer perspective. This doesn't have to require a major cash investment if you're strapped, she points out. "You can find a planner who will give you a one-hour consultation for $150."
You can find fee-only planners through NAPFA, Garrett Planning Network and coaches at the International Coach Federation site (see links at left under Related Sites).
When it's time to do the math
The first step toward regaining financial stability is to take a deep breath and assess the damage, says Wall, also the co-founder of the Women's Institute for Financial Education. "One of the big mistakes people make when they're in a financial crisis is not being courageous enough to make a clear assessment of where they're at," Wall says.
This can be overwhelming. (I know. Here, have a hanky.) But toting up the damage serves two important purposes. First, you need to figure out how much you owe, how much money you have in reserve, and what it will take to cover the distance between them. Second, you need to head off any other mishaps -- penalties, further repairs, missed deadlines, etc.
I hit some financial hot water in the weeks before my wedding -- as if that didn't cost enough already. On top of all the usual, irritating nuptial expenses, I had car trouble ($200) and a small plumbing repair ($100) -- and when the water heater broke two days before the Big Event, I had to shell out another $350.
It wasn't dire -- I wouldn't even call it a crisis -- but it was a pretty big setback. And I wasn't prepared. Ideally, those unexpected expenses would have been covered by the funds in the Irregular Expenses account in my budget. (For the full story on the budget method I follow, read "A simpler way to save: the 60% solution.") But those were tapped out by the wedding. And that's a common problem. You might have an emergency stash -- but it's often depleted.
That's when people make the mistake of turning to plastic (um, hi). "That's just transferring your problems from one pocket to the other," says Wall. "I have no problem with people using credit cards, but you have to know how you're going to pay those off."
If you're truly tapped out, you may want to consider taking out a home equity line of credit. The interest is tax deductible, but those aren't fixed rates. And unless you plan to pay back the amount you borrowed promptly, it can end up costing you more than you thought -- especially if you deplete your own equity.
Likewise, Wall says, think twice before borrowing from your 401(k) or IRA. There are loopholes that allow you to do so, but there are often hidden costs -- never mind potential taxes, penalties and other consequences. For example, if you lose your job, you'd have to repay the loan immediately, or be taxed as though it were a withdrawal. (For more on tapping your retirement money, read "Warning: 401(k) loans are hazardous to your wealth.")
Quick cash infusions
Here are a few other ways you might be able to increase your cash flow, without going further into debt.- Turn a hobby into dollars. Can you walk dogs? Teach ice skating? DJ? Babysit? Do Web design? Consider which of your talents could be worth a few extra bucks.
- Work part-time. The holidays are coming up, and many people supplement their salaries with part-time retail jobs. Just don't spend it all on holiday gifts.
- Spend smarter. We all have our mindless money wasters (Read my column, 10 ways you mindlessly waste money.) Now see if you can eliminate the ones you wouldn't miss. Just saving the buck you'd normally put in the office soda machine each day adds up, says Wall.
- Borrow from a friend or relative. The interest rate is low to nil, the cash is quick -- but guilt is higher. "Just make sure you have a plan for how you're going to pay back the loan even before you approach them," says Wall.
(For more ideas on creative ways to save, read "20 ways to save on a shoestring.")
Where did I go wrong?
It's tempting to cry, "Why me?" and believe that these events came out of the blue. But that's probably not true. And that's what you have to face if you want to avoid future financial crises.
Not that you want to wallow in self-blame, but taking a series of financial hits is an excellent opportunity to learn where you went wrong, where you're not paying attention -- and how you might be setting yourself up for future financial setbacks.
Be Prepared. Take the snafu before my wedding. True, there was no way I could have anticipated that on top of all the other extra expenses -- I'd have even more surprises. But that's life. It's inconvenient. And if you want to be cushioned against it, you have to anticipate the unanticipated.
Be Careful. An emergency fund is for . . . emergencies. It's not supposed to be depleted every month. If I took a closer look at my expenses these last few months, I'd have to admit that I was leaning heavily on my emergency account to pad my budget, instead of saving it for the inevitable water heater implosion.
Pay Attention. Ginita Wall tells a not-so funny story about a client who noticed that her towels were slightly singed when she took them out of the dryer one day. But instead of calling the Maytag repair guy, she shrugged it off -- until the next load caused her house to go up in flames. We all have moments where we glimpse a potential crisis hovering on the horizon.
Plan Ahead. The clutch is going to give out every 80,000 miles or so. The roof, every 15 to 20 years. A vacuum cleaner every five. Believe it or not, says Gunduz Caginalp, editor of the Journal of Behavioral Finance, people disregard these averages -- and pay for them later. "They don't understand how strong the tendency is to be near the mean," he says. Since my mechanic told me a year ago that I'd need to replace the rear shock absorbers in six months -- I better do that now, before I create another crisis for myself.
My four-year-old laptop is getting creaky. I could wait until it dies. But according to Murphy's Law of Money, it will expire at the worst possible moment. Either way, paying for a new computer is an ouch, but planning ahead gives me some control over when I take the hit and I can start saving now for the inevitable.
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