How to manage your finances in crisis

Reading Time: 3 minutes

In a crisis it is highly likely that your finances will suffer first. This can even worsen the situation if you do not have a strong financial back up. Therefore, you need to know how to manage your finances in crisis.

Life is not predictable, therefore some unexpected events can happen that can change your life completely. Crises have different forms and it is important to understand the type of crisis you are in. Your ability to distinguish whether it is a short term or long term crisis can help you on finding the most appropriate way of solving it.

In this article we will go through some of the tips that can help you to manage your finances in crisis.

1) Avoid making rushed decisions

Your reaction to a crisis is what makes it worse and the number one enemy is panic. With panic comes lack of patience. As you become more impatient then desperation will chip in and this results in poor decisions. Worsening your situation means spending more money on the crisis.

When you are desperate, it is easy to undervalue your potential.  The decisions that you will make are influenced by bad emotions. As a result, you will make a decision without properly thinking about its consequences.

Therefore, you need to be more patient with yourself. You need to take your time to decide and explore several options to avoid the issue of worsening the situation. You have to consider the impact of your decision on your long-term goals.

For an investor, it is very important to avoid panic trades. If your shares are losing money, hold on for a while and analyse if there is a chance that the share price will rise again. If you sell your shares when the price is low, you will lose your money. Investing is more rewarding for the more patient investors. When others are panicking, if there is a chance that the shares will recover, then buy more shares – you need this short term volatility to make money on shares.

Things are not the way they appear to be. What may appear to be a deadly crisis may actually be a test of character. It may be the best time to make money.

2) Do not change your budget fast

Depending on the type of crisis you are facing, avoid making quick adjustments to your budget. A crisis do not define who you are, therefore you  do not have to change your goals. You can slightly adjust your budget such that, you give more attention to the crisis but without neglecting other important aspects.

The starting point is to cut unnecessary expenses on your budget. Cut off all the expenses you can live without and leave only expenses in the needs bucket.

Furthermore, the biggest trap is that of withdrawing from your savings and investments during a crisis. You can start by using the money in the Emergency Fund and avoid the temptation of quickly going for investments. Investments and debt should be off limit except for worst case scenarios.

If you are to take money from a savings account meant for other purposes, treat it like a loan and pay it back when the crisis is over.

3) Avoid making many important life changing decisions at the same time

What often cause a crisis is when you try to do all important decisions in a short space of time. It is easy to feel like you have been left behind if you compare yourself to your friends but the truth is that life cannot be rushed.

Avoid the temptation of getting a new job, a new car, having a wedding, having a baby or enrolling for a postgraduate degree in the same year. This may strain your finances badly and it may take time for you to recover.

If you do not properly manage this, there is a higher chance that you will end up in debt. This can lead to a crisis that can take many years to solve. Each long term decision needs proper planning before you commit yourself to it.

In addition, do not jump between jobs in search of more money to address a short term crisis. If you do that, you may lose in the long term despite the fact that you may enjoy a short term pay rise. Factor in things like the location of the job, the accommodation and transport costs as well as the growth opportunity for the job. If you know this, you can avoid making a decision with bad long term consequences.

In conclusion, you can survive a crisis without making decisions that will worsen your financial position. Emotions have the power to drive you into making poor decisions in times of crisis. If you know how to manage your finances in crisis, you can convert a crisis into an opportunity.