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Financial emergency - budgeting to recover
02 November 2020
Key takeaways in this 3-minute read
- Financial emergency - what is it
- Money management - create a personalised budget
- Use your budget to recover from financial emergency
Financial emergency – what is it
There are many reasons for why we might experience a financial setback. It might be due to job loss, natural disasters, extended illness, changes in your family situation, out-of-control spending and debt, a home emergency. A financial emergency is a significant unexpected expense that will have serious consequences if you don’t deal with it immediately.
Acknowledging how the emergency will or has affected your finances and what that means for your future financial independence is a difficult but important step to take toward making a solid recovery.
You may also want to think about:
carrying out a full assessment of where you stand right now,
reassessing where you want to land in the future,
putting together a plan to help you recover and to make sure you’re ready for anything in the future.
Money management - create a personalised financial budget
A budget can be a helpful personal financial planning tool. Budgeting:
- focuses you on looking at your financial standing, helping you understand how much money you have available to use now and into the future,
- shows all the different ways you use money,
- reveals where you are spending most, and
- identifies whether you may be overspending or whether you may have money left over.
Budgeting helps you develop your financial resilience. If you know what you have and what you’ve got coming in, and you know what you’re spending and saving, then you’re in control of your money and may be able to save and build an emergency fund as a buffer for the future.
Steps to start your financial budget
- Identify everything you currently spend your money on. For a month or even better, three, write down everything you spend. Using receipts and previous bank statements, which you can find through your banking app, will speed this up. Include any loan repayments. Don’t forget bills and things you pay quarterly or once a year, like car registration or insurances. A family expense tracker app can help with this step.
- How much money is coming in? Compare what’s going out to what’s coming in.
- What expenses can you reduce? Some people break their expenses into: commitments to others (such as loan repayments, or phone plans), necessary living expenses (such as food, housing, transport, health) and nice-to-have lifestyle expenses (like entertainment, personal services, recreation).
Start now with the budget planner in our Good Money Management Guide
Use your budget to recover from financial emergency
Nice-to-have lifestyle expenses are often the first to be cut… but STOP. Often you can reduce the other expenses and leave yourself some room to enjoy life.
Start with your financial commitments to others. List them and how much you owe? Figures like what are your repayments and what are the interest rates are helpful to have.
Reducing or repaying those loans (like credit cards, mortgages, personal loans) with the highest interest rates first will help.
While cash is short and if you’re making more than the minimum repayment on loans, for example, it may be easier to repay the minimum, increasing them again as things pick up.
You might consider the option of consolidating any credit card debt to a card with a lower interest rate. Check the terms and conditions of the option if you decide to do this. For example: make sure any balance transfer isn’t going to come with a transfer fee, higher fees for additional purchases and higher interest rates and fees after the grace period.
Try reducing your necessary living expenses. This might include internet, electricity, and water use and, when it comes to food, there is pretty good evidence shopping to a menu plan can help bring the cost down and cut waste.
A couple of other food tips: fruit and vegetables in season are usually cheaper; cooking at home isn’t as expensive as eating out or getting takeaway.
While recovery might be linear – one step following another - the emotions that accompany it are anything but. It’s common to experience a whole range of feelings like anger, loss, guilt, fear. They often last for different lengths of time and can vary in intensity. Often, it’s the emotional burden of getting back on your feet that can make the whole thing feel so difficult. If you are feeling overwhelmed do get help. You can talk with your doctor or access support through organisations such as Beyond Blue, Lifeline (call 13 11 14), or Black Dog Institute, for example.
Explore simple ways to take charge of your finances with our Good Money Management Guide