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How to manage a financial setback: 8 rules to bounce back during the COVID crisis

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    Article Highlights

    Most people experience an unexpected crisis that shakes their financial world. It could be losing a job, receiving a huge medical bill, or having a car break down at the worst possible time. But surviving a pandemic is a situation you probably never thought you would face.

    The COVID crisis has resulted in more than 160,000 deaths and put millions of people out of work. For those struggling financially, here are eight critical rules to manage money wisely, stretch your resources, and bounce back from this unprecedented health and economic disaster.

    Rule #1: Accept your situation and ask for help.

    The key to successfully navigating a financial setback is to be realistic. If you’re in denial and don’t face money troubles head-on, you can quickly compound the damage.

    Instead of focusing on the problem, getting angry, or letting stress overwhelm you, channel your emotions into finding solutions. Start talking about your challenges with people and professionals you trust, such as a money-savvy family member, financial advisor, legitimate credit counselor, or an attorney.

    The following financial associations have certified volunteers who can offer free help and advice:

    Rule #2: Get a bird’s eye view of your finances.

    To fully understand your situation, create a list of what you own and owe, called a net worth statement. Compiling your data in one place helps you evaluate your financial resources, make decisions more efficiently, and have essential information at your fingertips if creditors or advisors ask for it.

    First, list your assets: 

    • Cash
    • Investments
    • Retirement accounts
    • Real estate
    • Vehicles 

    Then list your liabilities:

    • Mortgage
    • Car loans
    • Student loans
    • Credit card debt

    Include the estimated values of your assets, the balances on your debts, and the interest rates you pay for each liability. You could jot down this information on paper, enter it in a computer spreadsheet, or create a report using money management software.

    When you subtract your total liabilities from your total assets, you’ve calculated your net worth, which is an indicator of your financial health. It’s not uncommon to have a low or negative net worth when you’re in financial trouble.

    Rule #3: Understand your cash flow.

    An essential part of bouncing back from a financial crisis is keeping an eye on your monthly income and expenses. Create a cash flow statement that lists your expected income and typical expenses, such as rent, utilities, food, prescriptions, transportation, and insurance.

    Again, you can create this report manually or by using budgeting features in a financial

    program. Understanding where your money goes is the only way to prioritize expenses and cut all non-essential spending. Making temporary sacrifices will help you recover as quickly as possible with less long-term damage to your finances.

    Rule #4: Shop your essential expenses.

    As you review your spending, it’s an excellent time to comparison-shop your essential expenses. Evaluate your highest costs first, such as housing, vehicles, and insurance, since they offer the most significant potential savings.

    For instance, you may be able to move into a less expensive home, purchase or lease a cheaper vehicle, and shop your auto insurance to find better deals. Ask your utility provider about assistance programs that offer energy-saving improvements at no charge.

    Rule #5: Communicate with your creditors.

    If you haven’t been in contact with your creditors, start a dialog with each one immediately. You’ll come out ahead and get favorable treatment from creditors if you are proactive and honest about your financial troubles. Ask them for solutions, such as deferring payments for several months, setting up a reduced payment plan, or refinancing a loan to reduce your financial burden.

    Creditors are likely to ask about details regarding your financial situation, so have your net worth and cash flow statements on hand when you speak to them. Be ready to complete any required assistance applications quickly.

    Rule #6: Prioritize your debts carefully.

    Based on guidance from creditors and any professionals, prioritize your bills and debts carefully. Your goal should be to conserve as much cash as possible without skipping essential payments. Always pay for necessities first: food, prescription drugs, and auto insurance.

    Use your net worth statement to rank your liabilities from highest to lowest priority. For instance, debts related to child support and legal judgments have severe consequences and should be prioritized. Keeping up with an auto loan is a high priority if you rely on your vehicle for transportation. Federal student loans are in automatic forbearance through September 30, and the relief may get extended through 2020.

    Your unsecured debts — medical bills, credit cards, and private student loans — are lower priorities. Never pay these debts ahead of rent, a mortgage, or utilities when you have a cash shortage.

    Rule #7: Don’t let collectors force you to make bad decisions.

    Prioritizing your debts means some may be paid late or not at all. If a debt collector contacts you about a low-priority debt, such as a medical bill or credit card, don’t allow them to persuade you to pay it before your highest priority bills.

    Collectors may try various aggressive tactics, such as threatening to sue you or ruin your credit. A lawsuit could take years, and a creditor is more likely to negotiate a settlement with you. Remember that a creditor or collector can’t send you to jail for civil debts.

    If you are behind on bills, that fact is likely already reflected on your credit reports. By the time a collector contacts you, the damage is already done, and paying the bill won’t improve your credit in the short-term.

    Rule #8: Take advantage of local and federal benefits.

    If your income and savings have entirely dried up, use these resources to learn more about local and federal benefits:

    • FeedingAmerica.org has a map showing local food banks. 
    • Supplemental Nutrition Assistance Program (SNAP) is the federal food program you may qualify for based on where you live, your income, and family size.
    • MakingHomeAffordable.gov can help you find a housing counselor or see if your mortgage is backed by the federal government and qualifies for forbearance. 
    • Benefits.gov has a questionnaire that helps you discover the benefits you’re eligible for. 
    • Medicaid.gov is the federal health insurance program you may qualify for based on where you live, your income, and family size. 
    • Healthcare.gov is the federal health insurance marketplace where you may find plans with substantial subsidies if you earn too much to qualify for Medicaid.

    Financial challenges can cause you and your family to experience a flood of emotions, including anger, fear, and embarrassment. As difficult as it might be to put a financial crisis into perspective, it’s critical. No matter what challenge you’re facing, you’re not the first. There are millions of people who are dealing with COVID-related financial hardships.

    Face the fact that your recovery could take a while. Do everything in your power to manage your budget wisely by getting organized, seeking ways to earn more, and spending less. Don’t be afraid to ask for help from creditors, seek free advice from professionals, and take advantage of every local and federal benefit possible.

    Laura Adams

    Laura is a frequent media source and has been featured on most major news outlets including ABC, Bloomberg, CBS, FOX, NBC, NPR, The New York Times, The Wall Street Journal, The Washington Post, USA Today, U.S. News, Consumer Reports, Entrepreneur, Forbes, Fortune, Kiplinger’s, Marketplace, Money, MSN, and many other broadcast, print, and online outlets. Laura’s mission is to empower consumers to live richer lives through her writing, podcasting, spokesperson, and advocacy work. Millions of readers and listeners benefit from her practical financial advice. Laura earned an MBA from the University of Florida. She and her husband reside in Vero Beach, Florida. Connect with her and learn more at LauraDAdams.com.

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