Surviving Financial Hardship: Tips for When Your Emergency Fund Runs Dry

In today's uncertain economic climate, having a robust emergency fund is more crucial now than ever.

Even the most prepared and financially savvy individuals can get caught off guard and find themselves facing unexpected financial challenges. Life happens and it can happen quickly. So, when your emergency fund starts dwindling you need to react quickly. To best prepare, it's essential you adopt strategies that effectively manage your finances and focus on problems you can fix, not the ones you can’t. Here are the steps you can take to best do so:

Assessing Your Financial Situation

The first step you should take is to perform a budget analysis, thoroughly evaluating your current financial situation. Not sure how to create a budget? We got your back, check out our budget calculator and debt to income ratio tool to calculate how much money your left over with at the end of each month. Once you’ve calculated and better understand your income and expenses and monthly debt obligations, you can take a more methodical approach setting yourself up for future financial success. Although budgeting might not be the most “fun” thing in the world, it will help you identify areas where you can cut costs and prioritize your spending. And that type of knowledge could help transform your life for the better.

Reviewing Your Budget and Cutting Expenses

Prioritize Essential Expenses: Focus on necessities like housing, utilities, and food. "Needs" will always come before "Wants". We need to drink water and eat food, we need a roof over our heads (although not everyone around the world is afforded this luxury). We don’t need to have 7 different streaming services on demand at our fingertips, we don’t need to have 11 different pairs of sneakers, etc. Once you’ve differentiated between needs and wants, it’s best to help put those into categorize so that you can see which expenses can be cut out altogether.

Contact Service Providers: Reach out to your utility companies, insurance providers, and other service providers to discuss potential discounts or ways you can reduce your monthly bills. IT doesn’t hurt to mention how long you’ve been a loyal customer. However, sometimes the most effective strategy is some simple honesty. Let them know you're undergoing financial hardship and have fallen on hard times. Not every company will genuinely care about you as a person but it can’t really hurt to ask. Maybe they have some discounts or hardship programs you’re unaware of or maybe you speak with an employee that’s in a mood to sincerely help a random customer.

Reduce Non-Essential Spending: After you have a proper budget in place and have your expenses listed, you need to prioritize them by opportunity cost. Prioritizing your monthly expenditures using an opportunity cost mindset will help you make better financial decisions. In the long term, it’s a skill that will help you make better decisions all around, not just financial ones. Temporarily cut back on discretionary expenses like dining out, entertainment, and subscriptions. Anywhere you can reduce expenses will be a plus further down the line!

Explore Side Hustles: Consider part-time work or freelancing to supplement your income. The economy is shifting more and more towards a flexible freelance economy. In the United States, over 6 million Americans over the age of 55 currently have supplemental income via a gig job. Any additional income will greatly help you make up the windfall of not having a financial cushion and hopefully allow you to get back that previous position. This is why many Americans have picked up extra part time work.

Managing Debt and Seeking Relief

Contact Creditors: Reach out to credit card companies, loan providers, and mortgage lenders to discuss hardship programs, deferments, or forbearances. It's possible some might lower your interest rates or have some other ways to help. You don’t know what you don’t know. Never be afraid to ask for help, even from unlikely sources.

Prioritize Unsecured Debt: Focus on paying off unsecured debts first, since they likely have the highest interest rates. You always want to tackle non-collateralized debt and unsecured loans to reduce the highest interest rate debt. This type of debt is considered bad debt, so it is also has the a detrimental impact to your credit worthiness. However, if you are struggling financially and have to pick and choose what bills you can pay and can’t pay, always keep current on secured debts. You should always to start picking and choosing what you can and can't pay, always handle secured and collateralized assets first! The reason being is if you become late on these bills you will likely lose your property.

Negotiate Interest Rates: Always try to explore options that lower interest rates on credit card debt or personal loans. You should always try to call your creditors and explain your situation. You have nothing to lose by calling your creditors and speaking to them candidly and plainly. You can ask them to lower your interest rates and see what hardship options they have available, if any. Getting results out of this process is not guaranteed, but it doesn’t hurt to ask!

Tapping into Savings and Investments

Consider Retirement Accounts: Unless absolutely necessary, explore withdrawing funds from retirement accounts like 401(k)s or IRAs. You should always be aware of the potential tax implications and penalties for doing so and leave this option as one of your last resorts. Getting taxed and penalized at the same time isn’t ideal, but if you a resorting to this, your current situation isn’t ideal either.

Cash Out Life Insurance: If you have equitable cash in your life insurance policy, consider withdrawing a portion of that cash against the policy. Again, these types of options are usually a last resort attempt to keep your financial situation afloat. Withdrawing from a life insurance policy isn’t something people typically want to do, it’s something they have to do.

Home Equity: If you have a significant amount of equity in your home, you can explore a home equity loan of credit. Ideally, you don’t want to turn unsecured debt into secured debt because if your situation worsens it will make your financial situation worse in the long term. However, this is a risk that many people take and an option that requires a good credit score. It's not at all ideal and I would not recommend using this option unless you really feel you have no other option and are dire financial straits.

Tips for Financial Management

Sell Unused Assets: A good way to declutter your home and make some quick money is by selling any unused valuable you no longer need. Sometimes, it’s easy to get emotionally attached to items if we no longer use them or need them but if we can let it go it can help us financially and also help live a more organized lifestyle! This could be a fantastic way to raise some cash in the short term and keep your finances afloat.

Food Budgeting: Another great way to manage your finances is by creating a meal plan so you can strategically shop for groceries to save money on food related expenses. The biggest and easiest opportunity here will be cutting down on eating out/ordering in. However, you can definitely look to spend less at grocery stores as well and do some coupon clipping. This will also help you cut costs.

Seek Free or Low-Cost Resources: There are so many hidden free and low-cost resources available to the public, we usually know nothing about. Knowledge is power with many of these resources; you just need to be in the know! So, always try to explore community resources, libraries, and online platforms for free or affordable options for entertainment, education, and support. Sometimes the best things in life really are free!

Leverage Your Network: Reach out to friends, family, or professional networks for potential job opportunities, financial advice, or assistance. It can be really tough to ask favors from others, especially in times of financial hardship but you don’t have to ask others for a handout. Sometimes simple words of advice or a different job opportunity can be the slingshot that sets you on a completely different trajectory. So always try to reach out to your network and see how "you can best help yourself" via your network of family and friends.

Financial hardship can be an overwhelming thing to handle. However, with careful planning and proactive measures, you can navigate these challenges and regain financial stability in the long term. By more completely understanding your financial situation, implementing cost-cutting strategies, and seeking appropriate assistance, you can emerge from this difficult period stronger and more resilient than ever.