How to Handle a Financial Crisis

Written by Vidya Kumar

August 21, 2018

Executive Summary: A financial crisis can give you a stressful time. Understand the reasons of the financial crisis, take steps such as reducing expenses and adding sources of income to reduce its impact and plan your finances such that you are prepared better if another crisis hits you.
A financial crisis is the last thing one wants. It can happen due to many reasons like job loss, unexpected losses in your business or investments that have gone horribly wrong or emergencies that have made a big dent in your financial status.
Financial crises can cause stressful times that can extend to long periods. It is easier said than done but  you have to keep calm  and take steps to reduce the effects of the financial crisis –

Evaluate the situation
Evaluate the financial crisis. Ask yourself what caused the crisis so that you will know the root cause of the problem and deal with it appropriately. Then understand and accept the financial hit that you have taken in numbers and how it will affect your lifestyle, your budget, your dependents, investments and liabilities. The extent of loss depends on the type of financial crisis. If you have gone through a divorce and do not earn an income, it will be a tough road ahead. If you have lost your job, you might still be able to get back quicker even if you take a lower paying job or part time assignments.

Take Steps to Curtail the crisis
There are many ways to reduce the impact of the crisis or curtail its effects.
1) Prioritize and Reduce Expenses – You have many items of expenditure and you may not need to pay for all of them. Make a list of the expenses and arrange them in order of importance. Expenditure on food, rent and medicines are required. Arrangements can be made to made to postpone payments on cable bills, gym membership etc.
2) Sell Things – If you look around your house, there might be things that you do not need or use. Is your treadmill being used for hanging clothes? Do you have antiques or some furniture that you can sell? You can use online markets to sell these items.
3) Communicate with Lenders – Do you have loans like a home loan, educational loan etc.? If you cannot pay the EMIs, renegotiate with the bank and try to increase the tenure so that the monthly EMI goes down or ask for a grace period. Do remember, this will come with a cost – higher interest rate, penalty etc. On the other hand, if you have a car loan, sell the car and use that money to pay off the debt. It will bring down your monthly expenses as well.
4) Reduce Debt Burden – Liquidate your FDs, mutual funds and pay off at least part of your debt, credit card dues so that you save on some interest.
5) Find Alternative Sources of Income – Find out additional/ other sources of income. Take tuitions, freelancing assignments or part-time jobs. You can try to monetise your hobbies if you have any.

Plan for future Financial Emergencies
Once you have overcome the financial crisis, analyse the methods you used to get over the crisis. There might be some steps that you can continue to follow like reducing some of the expenses or debts. Analyse the situation that put you in the financial crisis and make a plan to be ready to face something similar. The plan can include –
1) Increased savings and investments – You will be able to sustain better with more wealth or avoid a crisis in the future. 
2) An emergency fund – Set up a financial buffer to take care of unforeseen circumstances like an accident, illness of a dependent etc.
3) Adequate insurance coverage  – Do you have adequate medical insurance? If not, this is the right time to increase the coverage. Ensure you have enough life insurance so that dependents do not have to face a financial crisis in case of unexpected circumstances.
4) Better Budgeting – Revisit your budget and check whether you can reduce your expenses. If possible, continue with the second source of income even after things have stabilised so that your income will increase and you will be financially better off.

Life is unpredictable. You might have to face tough situations. If you take the right steps and have a proper plan in place, the financial aspect of the crisis will not affect you severely.

By Vidya Kumar

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