A financial crisis can hit at any time. And unfortunately, most people aren’t prepared for the very serious changes that can happen in their lives when one does.
To be honest, creating a “crisis budget” is not on top of anyone’s to-do list, especially when you’re dealing with whatever emergency caused the financial fallout. But sitting down to work out a plan will actually help you stay afloat by freeing up money and lowering your stress level, so you can cope with whatever you’re going through.
Here are 5 simple steps you can take to get through a financial crisis and emerge on the other side in a better position, so you can rebuild your wealth and avoid any long-term damage to your finances.
Step #1: Rethink the Rules About “Smart Personal Finance”
There are plenty of standard rules to follow when it comes to personal finance, like:
- Stash money in an emergency fund.
- Max out your retirement account contributions.
- Pay down your debt as fast as you can.
- Spend less than you earn.
This is all great advice for when things are going well.
When everything goes to hell in a handbasket, these rules get flipped upside down.
Immediate access to cash and financial resources become priorities. You’re in survival mode and anything that doesn’t contribute to your survival can wait. Right now, focus exclusively on your most important needs, like food, shelter, medicine, and transportation.
Unfortunately, your overall finances will probably take a hit as this crisis rolls over you. That’s okay, and it’s expected. Your longer-term financial goals will have to go on the back burner, but they won’t disappear entirely if you have a solid plan to follow.
Your New Financial Crisis Rules
It may feel strange to put aside the standard personal financial advice that may have served you well until now. But you’re going to need to adopt some new, temporary rules to see you through this difficult time, including:
- Preserve cash at all costs.
- Stop saving for retirement and long-term goals.
- Stop paying down debt above your minimum payments.
- Wherever possible, negotiate to lower or pause your debt payments.
- Keep your credit cards active to avoid cancellation or limit reduction (even if you don’t need to use them yet).
- Apply for increased credit limits or additional credit cards, preferably 0% interest cards.
Yes, these crisis rules would make most financial advisors’ heads explode. But their regular rules don’t work when you’re dealing with emergency circumstances.
In a crisis, you have to maximize your access to resources because you don’t know how long it will take to get through it or how much you’ll need to get by. When you create enough financial space to allow you to function as long as possible, you limit the risk of falling over a financial cliff.
And yes, changing your good financial habits will probably feel uncomfortable. But don’t let this discomfort stop you from doing whatever you need to get through this difficult time. Remember this is all temporary. And your crisis rules will help you can get back to your “normal” financial life sooner.
Step #2 Refocus Your Current Financial Goals
It’s scary to lose ground on your financial goals. You may feel like your finances will never recover… that you’ll never catch up. But you have to refocus those goals right now to save your future finances.
These new goals are temporary. And taking what feels like drastic steps backward now will set you up to move forward faster, once you’re on the other side of this emergency.
Your new financial goals are straightforward:
- Cover essential expenses.
- Cover noncritical needs.
- Avoid tapping into your retirement funds.
- Avoid taking on debt.
Accept that right now that it may be impossible to meet all of these goals, especially at first. But once you can meet the first goal, you’ll have enough space to figure out the rest of your plan.
Step #3 Create Your Short-Term Financial Crisis Budget
The tricky part of any emergency is unpredictable income and expenses, which makes it harder to plan. You will have extra steps to take to prepare your crisis budget, so you can make sure your most essential expenses get covered every month.
Yes, your and your family will have to make some sacrifices in the short term. These temporary changes will help you survive until your financial situation stabilizes and things can get back to normal. Once that happens, you’ll be in a much better position to recover and rebuild your finances, so you can regain your long-term financial security.
Prioritize Your Expenses
We all have absolutely necessary expenses each month. Take some time to write yours down and prioritize them, so you have a handle on what you must keep and what you can potentially sacrifice if you need to.
I recommend ranking each expense based on how much you truly need it to survive. Look at your expenses with an objective eye to determine what you really need right now and branch out from there.
Here are some examples. Yours may look different, but this should give you a good idea of how to create your list. Include the item and the cost on your list.
Rank 1: Essential Expenses Necessary for Life, Health, etc.
- Mortgage or rent payments
- Medicine and immediate medical care
- Transportation (prioritize essential travel right now)
Rank 2: Necessary but noncritical expenses involving security, stability, and loss prevention
- Insurance (health, auto, homeowners/renters, life)
- Minimum debt payments
- Clothing (primarily for growing children)
- Routine medical and dental care
- Car repair and maintenance
Rank 3: Unnecessary right now, but payments you’ll want to start again as soon as possible
- Emergency savings
- Retirement savings
- Aggressive debt payment
- Any previous savings goals
- Memberships and activities you use regularly
- Paid apps and streaming services (some of these may fall under Rank 2 depending on your life and family needs)
Rank 4: Things you can SURVIVE without
- Memberships you no longer use
- Multiple streaming services
- Household services and help (cleaners, landscapers, dog walkers, etc.)
- Dining out and entertainment
Your Rank 1 expense total is how much money you must have to survive every month. If that’s all you can cover right now, that’s okay. Just covering these expenses will help you and your family get through the next month or two, so you can figure out your next steps.
If you have a little more, you may be able to add in some or all of your Rank 2 expenses, which will help you stay in a more financially secure position in the long run.
Identify Your Cash Resources
Next up, figure out how much money you’ve got immediate or easy access to, so you can weather the next few months.
Make a list of every financial resource you could use to pay for your expenses, but only list resources that you have guaranteed access to. Don’t include money you expect to get in the future from other sources or loans and benefits you need to apply for. Think of this in terms of “I can use this right now to buy groceries or pay the rent.”
Here are some examples:
Available cash coming in:
- Your regular income (include all jobs you currently hold)
- Unemployment benefits
- Social Security Benefits
- Any existing side gig that currently brings in more money than it costs you
Assets you can use:
- Current savings
- Investment accounts
- FSAs and HSAs
- Roth IRA
- Traditional retirement accounts
If you have a Flexible Spending Account (FSA) or Health Savings Account (HSA) use it to pay for qualifying expenses. Remember to check what limits exist on how you can spend this money. Use your FSA funds first because that money disappears at the end of the year.
Money you could borrow with minimum difficulty:
- Credit cards (use your current available balance, not your credit limit)
- Home equity line of credit
- Personal loans
Obviously, you want to avoid going too far down this list to cover your basic needs. If you have to, don’t worry. You’ll have time to recover financially and replenish these funds once life gets back to normal.
I want to make this as easy as possible for you, so I’m sharing my special Cash Resources Worksheet with you. This Worksheet walks you through all of the potential cash resources you may have access to and helps you calculate them quickly and easily.
Click on the button below to download your copy now.
Step #4: Know How Much You’ve Got Covered
Now that you know how much you have coming in and how much you have to lay out every month, you’ve got what you need to create your crisis budget.
Remember as you create a crisis budget, this is a short-term situation, think the next 30 days. After that, your financial picture may look very different, so you’ll want to reevaluate.
Financial crises can be unpredictable and will often include factors beyond your control. Focus on this budget as the stopgap measure it’s meant to be, until your situation stabilizes again.
Ideally, you’ll have dependable income to cover at least some of your critical expenses. If not, make your way down the Expenses and Cash Resources lists, in order of priority, until you have matched your incoming cash with your most critical outgoing expenses.
If All Your Rank 1 Essential Expenses are Covered By Your Current Income
You can breathe a sigh of relief. Move on to your Rank 2 expenses to see what else you can afford for the next couple of months.
Prioritize your Rank 2 expenses in order of their importance to you and your family in terms of stability and security. For example, your health insurance premiums and minimum debt payments will probably outweigh a routine dental cleaning.
If you’ve got your Rank 2 expenses covered with a bit of income to spare, I recommend that you save money and stash it in your emergency savings. As much as you may want to cover some of your Rank 3 priorities, the first month of your crisis, you will want this cash buffer, just in case something else goes wrong.
If You Don’t Have Enough Current Income to Cover Your Rank 1 Essentials
This happens, and it’s scary. It can make you feel anxious and panicky. But taking these steps will help you take control of the situation – and the situation will change.
At this point, you have 5 options:
- Reduce your essential expenses – This may not be feasible during this first month, but you may be able to delay certain expenses. You may also need to use credit cards to pay for some expenses, such as food and gas. Do that, and don’t beat yourself up about it. You’re doing what you need to do to keep going.
- Increase your current income – Find some way, any way, to bring in something to cover essential bills. It may not be what you’d normally do, but grabbing gigs on DoorDash, TaskRabbit, and Rover can bring in some desperately-needed cash quickly.
- Use your emergency savings – This is exactly why you have an emergency fund. Use it. It can be very hard to pull money out of here – it might feel like failure. But it’s the opposite: the fact that you have emergency savings to tap into means you’ve already succeeded. And when things calm back down, you’ll be able to rebuild your savings.
- Raid your investment and retirement accounts – Do this only after you’ve exhausted your first three options. But if you need to, use these resources to survive. You may end up owing taxes if you sell investments, but it could also lower your tax bill.
I do recommend talking with a trusted financial advisor if you choose this option. Having an outside, objective perspective can help you determine what the short- and long-term fallout may be, as well as how to reduce the overall negative financial impact as much as possible.
- Take on new debt – While we’ve already talked about putting essential expenses on credit cards, that may not be enough. Before your credit score dips, consider taking out a personal loan or borrowing against your house with a Home Equity Line of Credit (HELOC), so you have the immediate cash you need to survive.
The sooner you take the necessary steps to cover your essential expenses, the easier everything will be. You’ll also free up brain space to figure out how to move forward and get yourself out of your current financial crisis situation.
Really, it’s all about making sure your essential expenses are covered right away. Everything else can wait.
Step #5 Make Adjustments as Your Situation Changes
Every good plan lasts about as long as it takes to put it on paper. Then everything will change. This is especially true in a crisis and every new change can affect your financial picture.
Expect the unexpected and keep your plan as flexible as possible to allow for frequent shifts in your income and expenses. You can update your budget as new sources of income emerge or a new expense pops up.
Your plan doesn’t have to be perfect – it just has to exist so it will get you through this difficult time. It’s far more important to take immediate action than to be right. You’ll be able to make corrections as things progress. So, get a workable plan in place as fast as possible and you can start moving forward.
The point of crisis budgeting is to have a tool you can use to determine how much money you need to cover essential expenses versus how much money you have coming in.
Once you know these numbers, you can figure out how to make up the difference, if you need to, or know you can squirrel away a little toward next month’s expenses.
Celebrate Every Victory
Let’s face it, things are going to feel rough for a while. And it can be hard to keep going during a crisis, especially one that hits you hard in the finances.
That’s why celebrating every little win is so important. As silly as this may sound, there is science behind it. Acknowledging every little win gives you a dopamine rush, which is a feel-good chemical your brain releases. This propels you forward to your next win, and the next, and so on.
So, any time you feel like you’ve achieved a victory, celebrate! Do a little dance, text a friend, eat a piece of chocolate (this is my go-to), whatever makes you feel better.
All of these small victories will start to add up, and you’ll start to see positive changes in your financial situation.
Get Your Cash Resources Worksheet Now
If you didn’t download your Cash Resources Worksheet, click on the button below to do it now.
Seeing every resource you have available to you right now will make things feel a little bit better. It will also help you put your current situation into perspective, so you can make your plan to get through the financial part of your crisis as fast as possible.