Dealing With Financial Catastrophes

No one is immune to financial catastrophe. In the United States, bankruptcies from unpaid medical bills alone are expected to impact almost two million people in 2013.

Financial disasters may be also caused by job loss, divorce, or higher interest rates that increase mortgage payments.

You can take a number of steps to mitigate the impact of financial disaster.

Here are some budgeting tips and other advice that can help you cope if you are faced with serious financial difficulties.

Build an Emergency Fund

Even if you have never experienced financial problems and have job security, building an emergency fund is one of the best budgeting tips. Ideally you should sock away six months’ worth of basic living expenses for your household.

To reach this goal, you need to know how much it costs to keep your family going for six months. You may become discouraged when you calculate this figure and wonder why you should bother, but this is the wrong mind-set.

Any savings is better than none. Save consistently, and if you can save automatically via direct deposit, do so.

[Read: 6 Steps to Starting an Emergency Fund]

It’s not easy to deliberately put money in savings when times are tight, and automatic deposit can help you maintain discipline.

Control Spending

To control spending, you need to know how much you’re spending and where the money goes.

[Read: 7 Signs You are Living Beyond Your Means]

As budgeting tips go, one of the most important is to add up withdrawals from your last 12 bank statements. Many people are shocked to discover how much they have spent.

Practical budgeting tips that really pay off include:

• Learning to cook or improving cooking skills.
• Buying frequently used, shelf-stable items in bulk.
• Asking your utility company to perform an energy audit to determine how your house wastes energy. Many utilities perform these audits for free.
• Including the family in budgeting. You don’t have to frighten children, but they need to know that times are tight. Your teen may be more willing than you think to take a part-time job.
• Carpooling when possible when commuting or taking children to school.
• Determining what discounts you’re eligible for. Student discounts, senior discounts, and discounts through your insurance policies may be available.
• Buying used when possible. Children’s Halloween costumes can often be put together from thrift store finds for next to nothing. Used textbooks can save college students money. If your car needs replacing, buying used saves money and prevents that new car depreciation hit.

Decide Which Bills to Pay First

You’re legally obligated to pay all your creditors. However, if you realize you won’t have the money to cover your bills for the month, you need to make some tough choices.

[Read: Which Debt Should I Pay Off First?]

Ask yourself the following three questions to help you prioritize which bills are most important:

• Which bills impact the family’s health and security? Usually, mortgage or rent, utilities, food, transportation, and health insurance are most important.
• What’s at risk if bills aren’t paid? Are you at risk of your car or home being repossessed? Know which debt is secured by possessions and prioritize these expenses.
• How high an interest rate am I paying? If you’re paying off big credit card bills with high interest rates, it’s time to lock the credit cards away until your bills are back under control. Pay as much as you can beyond the minimum each month.

Keep Lines of Communication Open

If you’re going to come up short on your electric bill, or if you’ll have to pay late, call and explain the situation. If you have a good history of paying on time, they’re more likely to cut you some slack.

Creditors would much rather you call them when you’re having trouble paying than for you to simply stop paying so that they have to track you down.

It’s not easy to make those calls, but avoiding the situation will only make it worse.

Handle Stress

Dealing with financial difficulties causes significant stress that can sometimes indirectly make financial problems worse.

[Read: How to Ease Money Stress]

If you’re overwhelmed by financial stress you may conclude, “Why bother?” and make poor financial choices, which worsens your situation.

You can’t take off for Tahiti for a week, but there are things you can do:

• Put the baby in the stroller and take a long walk.
• Watch a movie.
• Soak in the tub while listening to your favorite music.
• Camp out with the kids in the backyard.
• Play with your dog or cat for 15 minutes.
• Call up a friend for a chat.
• Make your house look nice. Everyone appreciates a clean, inviting space.

If your stress is overwhelming to where you can’t cope with daily living, seek professional help. Make an appointment with your doctor, or if that’s too expensive, ask a trusted member of the clergy, or the director of a local charity for referrals.

Many local charities and thrift stores offer help with bills and have food pantries, so you can keep the lights on and have enough to eat. There is no shame in asking for help when you need it.

In fact, it can be a positive step toward conquering a problem.

Financial disaster can happen to anyone. View the problem clearly, take practical steps, and ask for help if you need it, and you’ll have the best shot at dealing with it and being able to move on.

Mary Hiers is a personal finance writer who helps people earn more and spend less.