It’s been almost 10 years since we faced the last major financial crisis.
Since then, most 20-somethings have enjoyed relative financial prosperity in terms of their investment portfolios.
Yes, it’s no secret that a high percentage of Millennials face challenges with crippling student loans and housing prices that are out of reach. For the fortunate, however, the last few years has been a period of wealth-building – with many seeing an uptick in their income and net worth.
While many young professionals have been “getting while the getting’s good,” this bull run will eventually come to an end. This isn’t based on any magic 8-ball or looking at tea leaves… It’s a natural result of the economy.
This post is part of Bear Week, an initiative by the blogger My Sons Father to help individuals and families prepare for an inevitable economic downturn. During these periods of financial uncertainty, it’s easy to panic… resulting in not only an emotional burden but sometimes questionable decisions as well.
Is “Bear Week” not enough to get you excited about your personal finances? You may want to check out our Jurassic Park-themed post, Reviewing Jurassic World: 4 Lessons to Save Your Money from Extinction.
In this post, we’ll look at some of the causes behind financial crises (personal and widespread), how you can avoid and minimize the effects of a crisis, and what tips you can use to get back on solid financial footing as quickly as possible.
Causes of a financial crisis
There are many circumstances that can lead to finding yourself in a financial crisis. These causes can be personal (specific to you or your family) or global (a downturn that affects everyone).
Personal causes of a financial crisis
If you’ve ever been laid off, you’ve probably had to stop and ask yourself, “How can I survive without a job?”
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Unemployment is one of the most obvious sources of financial trouble. Most individuals will be let go at one point or another. You may receive a severance package or qualify for unemployment, but if you’re unable to find a new job within a month or two, you’ll quickly find yourself in a financial crisis.
Other personal causes of a financial crisis:
- Medical bills
- Car accidents
- Unplanned home repairs
Even if you haven’t found yourself without a job or involved in a car accident, you can create your own financial crisis by making unwise financial decisions – if you’re frequently spending more than you earn, it’s easy to dig yourself into debt that’s similar to a major expense!
Global causes of a financial crisis
Not every money crisis you experience will be the result of your own behavior or those around you. Sometimes you experience financial difficulty as the result of a national or global economic downturn.
According to research titled “Financial Crises: Explanations, Types, and Implications,“ there are four major types of global financial crises:
- Currency crises: doubt over a country’s central bank to maintain its exchange rate
- Sudden stops: an abrupt end compared to a past influx of investment money
- Debt crises: a rapid increase in public debt compared to tax revenue
- Banking crises: a “bank run” where everyone tries to withdraw money at once
Any single one of these crises (or a combination of them) can send the economy into a “bear market” – in other words, a selling and pessimistic market.
While some of these financial terms may seem removed from your personal finances, they can definitely affect your life. Housing prices could plummet, companies may have to downsize or shut their doors, and your long-term investments may take a dip until the market recovers.
How can a personal financial crisis be avoided?
It’s not always possible to avoid a financial crisis. As explained above, some financial hardships may be the product of your own decisions, but many times, these troubles are the result of outside influences.
Your responsibility is to take ownership of your personal finances and make preparation as far in advance as possible. These will allow you to potentially minimize your losses, and provide you with greater peace of mind until the situation improves.
How to survive a personal financial crisis
If you need to survive with as little money as possible, here are a few tactics that will help you prepare ahead of time to make it through hard times.
Build your emergency fund
An emergency fund should be one of your top priorities when first starting on your personal finances.
The popular recommendation is to keep an amount equal to 3-6 months of your monthly take-home income in a liquid account (meaning it’s readily available without needing to pay fees or wait several days).
It may take some time to reach that $10,000 to $20,000 safety net, but start saving immediately if you don’t have an emergency fund already. Even having $1,000 stashed under your mattress could help bail you out during difficult times!
While a financial crisis might last longer than six months, this emergency fund will buy you some time to make additional changes such as finding a new job or scaling back your expenses.
Losing your job doesn’t mean your credit card payments, student loans, or mortgage will be put on hold.
In the best-case scenario, you’re going to rack up interest charges by making just the minimum payments on your credit cards. If you’re unable to make your monthly payments for an extended period of time, watching your credit score drop will be the least of your worries as you may be at risk to lose your home and vehicles.
This is why it’s important to eliminate as much of your debt as possible while your finances are in good standing. Doing so will reduce your financial burden when finding money for the minimum payment isn’t so easy.
If you do find yourself with debt payments you can’t afford, be proactive about communicating with lenders before the situation spirals out of control. Student loans can sometimes be put on hold during periods of unemployment or economic hardship. Other lenders may be willing to waive a late fee or settle a debt for less than its original value.
Learn how to live on a budget
Using a budget to manage your money doesn’t happen automatically. It takes planning and discipline.
Building an emergency fund is typically your first financial goal, and learning how to create (and follow) a budget is typically your first financial habit to help you get there.
Learning how to live on a budget now can help you prepare for hard times by:
- Helping you build up savings or pay down debt now, and
- Teaching you to live within your means, no matter how much or little you have
“Living below your means” is a phrase that’s commonly tossed around. What does it mean?
Simply spending less than you earn. A budget is a tool that makes this easier by giving every dollar a job. Training the “budget muscle” now will make it easier to live on less if you need to later.
Keeping a budget can help you identify unnecessary expenses, set aside money toward financial goals, and save you from living paycheck to paycheck.
Understand your net worth
Calculating your net worth will help you make peace with your financial past, understand where your money currently stands, and provide a benchmark to measure future progress. Your net worth is widely considered as one of – if not – the best indicator of financial health.
At the most basic level, calculating your net worth is easy: Net worth = Assets – Liabilities
If you’re calculating your net worth manually, it can take time to thoroughly collect and calculate everything as precision is important for truly understanding your situation! Thankfully, there are many tools such as Mint and Personal Capital that can help measure your net worth in real-time.
To “future-proof” yourself against financial crises, you’ll want to reduce your liabilities (which can be done by eliminating debt) and build your net worth into the positive. If you find yourself in a financial crisis with negative net worth, this means that even if you sold everything you owned, you’d still find yourself owing money to others. Ouch!
Diversify your income
Increasing your income with a side hustle can provide an insurance policy if a change in your employment status is affected by (or the cause of) a financial crisis.
Here are just a few ideas to help you get started:
- Offer consulting services in an area you have expertise
- Take on freelance work as an article writer or social media manager
- Open an eCommerce store on Shopify, Etsy, or Amazon
- Participate in online surveys while watching Netflix
Extra money is never a bad thing, right? Before financial trouble hits, you can use this additional income to speed up your savings and debt repayments. During financial trouble, this money can help supplement or partially replace your primary source of income.
Create a plan
During times of financial abundance, you can sometimes get away without any specific financial plan in place.
It’s definitely not optimal for building wealth or saving for retirement, but you may not have to worry about your basic needs being met. You’ll be able to keep a roof over your head, make your payments, and hopefully set aside a little money for later.
Improvising with your finances during a period of financial hardship is unlikely to go so well. You’ll want to make sure you have a specific plan in place that minimizes the amount of debt you take on and stretches out your savings/emergency fund for as long as possible.
Remember: even if you are making sound financial decisions on your own, you will find yourself affected by money-related crises from time to time.
While you can’t always predict the timing or severity of these events, you can prepare in advance to minimize their impact on your financial stability and emotional peace of mind.
It’s not a consolation prize anyone is searching for, but there’s a silver lining to any financial crisis: it creates an opportunity to get your money in order.
By learning how to manage your money conservatively in times of need, you’ll be well prepared to enjoy a future of growth and abundance when the market (or your own personal circumstances) turns around.
What steps have you taken to prepare for the possibility of a financial crisis?