Considering the financial crunch this pandemic has left us reeling from, it’s no wonder that many of the spendthrifts among us are looking for ways to save money not for a rainy day, but as lockdowns go, for rainy months at a time. And not just the spendthrifts, but if this pandemic has taught us anything aside from the importance of hygiene, it’s that a little extra money saved on the side does not hurt anybody, and sure comes in handy when the stimulus check does not come through and you’re starting to feel the crunch. So, in recent times, it has become more important, at least for us who aren’t born into money and don’t have passive income working for us
How Can a Personal Financial Crisis Be Avoided?
Many might argue that the lockdown-ensued financial crises were unseen and uncalled for, but as far as personal financial crises go, nobody really sees them coming. Because if you could see them coming, well, wouldn’t you work to prevent them? And that’s how it all goes down; you start spending a little too much, get comfortable and think that this is a lifestyle for you. Suddenly, some big expenditure comes up and boom.
There goes your lifestyle, your precious things you spent so much on. And now the bank wants its repayments, the car loan is all clicking above and rent, well, you got to have a nice apartment. Add all of this, and suddenly you find yourselves in the middle of a personal financial crisis, moving in back with your parents. So, how can you prevent a financial blowout?
It all starts with intelligent financing. Yes, we all have wishes, but it’s better to save up and cut back on things that are considered a luxury or you can spend your time without. We’re not asking you to stay to the bare minimum, but there are times when even securing those gets a little difficult, so you will have to plan ahead and sort out your finances; expenditures and savings, in such a way that making a purchase out of a want does not break the bank, and you still have a considerable amount in your savings.
Determining Needs and Wants
The first step towards avoiding a personal financial crisis is by identifying your needs and wants. Now these two terms might seem interchangeable, but according to economics, they’re not. Needs are something that are indispensable; you cannot live your life comfortably without them. Whereas wants are things that aren’t necessary to live with, but they would sure be nice to live with. Let us give you an example over how this works,
A car is a need if your commute to work is, say 50 miles and the public transport doesn’t measure up to standard. The same car becomes a want when your requirement is perfectly being satiated by the public transport system. Now don’t get us wrong, it’s okay to want good things for yourselves, but this is a passage on how to avoid a personal financial crisis, not on how you can manage your wants.
To take the example further, getting a Honda if you need a car is perfectly okay. Getting an Acura for the same boring old commute is called catering a want, not a need. Your need is being taken care of with a car, why go for the same one with more premium to pay for it, if you catch our drift.
5 Ways to Prevent Financial Crisis
Here are a few ways to prevent a financial crisis and avoid a personal financial crisis.
- Limit spending
The first and most effective way of controlling your finances and managing them in such a way that a financial crisis is not a problem is by limiting the spending part of the budgeting. For instance, if you go out for dinner or lunch three days in a week, make it two or one day. Like this, limit spending and cut down on expenditures where possible. Use the needs over wants rule to help determine what you can cut down on, and what is to be continued in expenditures.
- Increase savings
When you’re done cutting expenditures, don’t start buying up things as they show up. No, the money you save from cutting back goes straight into a savings account, where no amount of love for anything can sway you into spending uncontrollably on anything. This is a two-way process; you save on the unnecessary spending and take that money and save it. This way, you have a pool of money for a rainy day, or even a rainy month and won’t have to worry about a personal financial crisis forcing you to move in back with your parents.
- Priorities bill/Repayments
One of the major expenditures that almost everyone faces are the bills and the repayments for any loans you might have taken out. Since they have a grace period of six to eight months, many people think it wise to try and touch the limit of non-repayments by spending the amount earmarked for the loan repayment on any other thing. If you’re trying to avoid a personal financial crisis, don’t do it. Understand that interest racks up on repayments, so there might be more hell in the future if you choose to forego on the repayments now. Priorities these repayments, pay the bank and the bills at your earliest, and it will go a long way into preventing a personal financial crisis.
- Cut Down on Unnecessary Subscriptions
It is the era of streaming; Netflix, Hulu, HBO+ and Disney+ are all the rage nowadays. According to a study, a good majority of Americans have subscribed to at least five of these services simultaneously, which amounts to over $200 a month spent on different subscriptions for viewing and streaming services. We’re not asking you to start pirating movies, but again, limit the non-essentials. If you have Netflix, HBO+ is then an extra, and you can do away with it and live comfortably. If you work and sleep most of the time, cancel all and go back to the basic cable. It’s how our ancestors wanted us to live anyway.
- Establish Sources of Passive Income
Your day or night job, whatever it is that takes up most of your time in a day should not be tampered with, since it is what makes you what you are. However, that does not mean that you can’t benefit from an influx of a little extra cash. In the era of digitalization, there are tons of ways you can find ways of generating passive income, one that takes up less of your time but generates a good amount. Start a small online business or freelance on the side. And make sure that money goes into the savings account, not your expenditure.
Also Read: Top Financial Trends For the Future Finance
The Bottom Line
Follow all these guides and you will easily be able to avoid a personal financial crisis. The only way to avoid a financial disaster is to be prepared and careful. With the right preparation, you can prevent a potential financial catastrophe from being a permanent setback.