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5 Tips to Overcome a Financial Crisis

5 Tips to Overcome a Financial Crisis

The fear of being hit with a miserable incident that could change your financial condition, like losing your job, impoverishment, or a sudden medical emergency, can be a nightmare for anyone. Such miserable events require you to make major changes in your life and the revitalization period is incredibly stressful. Often, it is the result of a lot of trifling constant worries building up to one huge breaking point, and then all of a sudden everything rushes through, constructing a tidal wave of anxiety and fear and stress.

However, your financial crisis can be remedied by regaining your self-control and taking solid actions. The financial benefits of dealing with financial crisis—saving more, paying down debt—will improve not just your self confidence, but your overall mood as well. The less you worry about dealing with finances issues, the more you can enjoy life. You may consider your circumstances as unique, but many people around the world have walked this path before you. The road to financial revival is shabby but the steps to return after the financial disaster are well-proven.

So let’s get started with some useful tips that will help you to get motivated to take control of your finances:

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1.  Identify the Problems

The first step to overcoming financial crisis is to identify the primary problem that is causing difficulties. Financial problems are generally an indication of a larger issue and to come up with long run solutions, you have to identify the actual cause of your financial troubles. The idea behind the importance of uncovering a specific problem is to come up with a permanent solution. Just like a leaky tap in your house; placing a bucket below it is a temporary solution. Fix the tap and the leak will stop permanently. Rather than dwelling on your stress, focus on resolving the problem that’s causing your financial problems.

2. Create a Budget

One of the best ways to deal with financial problems is creating a budget plan. A budget is a weekly, monthly or a yearly spending plan for your money that guides your spending decisions on important stuff for you. As you create your budget, it’s important to track your expenses for at least a couple of weeks (a month is best) to objectively see where and how much you are spending.

Once you are able to get realistic numbers from your budget, you can review your budget critically and seek out areas where you can save. Things like spending less on eating outside, spending less on entertainment or hobbies, taking lunch from home to work rather buying it are things that don’t make you miserly or restrict your budget. They just allow you to go after bigger things with less stress, like paying off your mortgage.

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3. Set Financial Priorities

Determining your financial priorities is essential to overcome any financial crisis. These priorities help you to make tough financial decisions such as paying off your credit card bill, paying your mortgage or saving up for house repairs for your family; setting priorities will help you solve your money troubles and get back on track. Your financial priorities should include looking into new ways to have money coming in too, like a second job, downsizing your home, or even using assets you have like a mortgage to leverage financial flexibility for yourself.

4. Address the Problem

For most people, financial problems can be addressed by reducing expenses and increasing income, or a little combination of both, but it might be not be the ideal option for everyone. For humans, changing lifestyle is the most difficult task, but given the money crisis situation, we are forced to make changes.

So to deal with it, take small steps to accomplish your goals because big changes are always much harder. For instance; if you’re running $50 short every month, then perhaps you should first pay off a small credit card debt that requires a $50 minimum payment each month. By taking small steps get the card paid off, and then permanently have $50 extra to use in your budget every month or use it for the payment of another debt, and get all of your debts paid off more quickly.

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This methodology is called the “snowball effect”; putting all extra money towards one debt to pay it off faster and then use the extra amount towards eliminating the next debt. It is very useful method for paying debts off faster.

5. Develop a Plan and Track Progress

Once you have ideas to tackle your financial difficulties, come up with a realistic plan to accomplish your financial goals with a timeline of weeks, months or years and track your progress continuously. For example, if your goal is to pay off a $2,000 debt, make a plan and create a timeline with the amount of money you will pay every month so that you can pay it off within your desired time frame. Once you are on the road to achieve it, take a few minutes to review the progress. Evaluate and assess your plan, see if you are making progress toward your goals and be open to the possibility of fine-tuning the plan.

Unforeseen financial challenges are like uninvited guests and can strike at the most unfortunate times. For example, recent findings show that 6 in 10 Canadians will face some major life events that will change their prior financial plans. The key to overcome these financial challenges is to be flexible. Make and review your budget and make necessary changes.

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Featured photo credit: Mitya Ku via flickr.com

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Tayyab Babar

Tayyab is a PR/Marketing consultant. He writes about work, productivity and tech tips at Lifehack.

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Last Updated on September 2, 2020

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways to set financial goals and actually meet them with ease.

4 Steps to Setting Financial Goals

Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

1. Be Clear About the Objectives

Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

2. Keep Goals Realistic

It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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4. Short Term Vs Long Term

Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

How to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a two-step process:

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

Ensuring Healthy Savings

Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

If you’re not sure where to start when tracking expenses, this article may be able to help.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

3. Make a Plan and Vow to Stick With It

Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

Nowadays, several money management apps can help you do this automatically.

At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

  • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
  • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
  • If you go shopping, always look out for coupons and see where can you get the best deal.

The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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5. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

6. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

Making Smart Investments

Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

1. Consult a Financial Advisor

Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

2. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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3. Compounding Is the Eighth Wonder

Einstein once remarked about compounding:

“Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

Use compound interest when setting financial goals

    Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

    Start saving early so that time is on your side to help you bear the fruits of compounding.

    4. Measure, Measure, Measure

    All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

    If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

    Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

    The Bottom Line

    Managing your extra money to achieve your short and long-term financial goals

    and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

    More Tips on Financial Goals

    Featured photo credit: Micheile Henderson via unsplash.com

    Reference

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