Dealing with Financial Disasters: Ways to Rise Above the Ruins

APR 12, 2012

Your car dies, and the repair will cost more than the Blue Book value. The hot water heater blows up and ruins everything around it. You or a loved one need a medical treatment that’s not covered by your insurance.

Almost everyone has been in the position of dealing with a financial disaster. Hopefully, when one happens to you, you have an emergency fund in place to help cover the costs. However, if you don’t have emergency cash on hand – or the expense is so great it will wipe out your backup funds – it can sap your spirit.

Financial disasters can come in many forms, from major car or home repairs, to unexpected medical expenses and even job loss. While it’s impossible to completely avoid life’s financial difficulties, or to ever be 100 percent prepared for them, it is possible to help your finances recover from the impact.

First, if you’re truly in a crisis situation, go ahead and tap your emergency fund. Losing the 1 or 2 percent interest your money is earning in a savings account beats paying the double-digit interest you’re likely to incur if you use a credit card to cover the expense. If it looks like the expense will exhaust your cash cushion, you’ll need to weigh your options and the long-term impact of each. If you’ll be able to rebuild your emergency fund faster than you would be able to pay off a big credit card bill, it may be worth the risk to use up your reserves.

If you don’t have an emergency fund, you’ll need to find other ways to pay for the expense. Your options might range from negotiating a payment plan and taking a second job, to personal loans from family or friends. Using a credit card should always be your last resort, as the high interest rate means you could be paying for your troubles long after the initial crisis is passed.

Once the expense is covered, focus on how you’ll repay the debt. If you had to take a loan, repaying it should become a priority. If you were forced to use a credit card, pay down that debt as quickly as possible. Don’t forget that replenishing your emergency fund – or establishing one if you still don’t have it – is every bit as important as paying for the crisis.

Finally, don’t beat yourself up if you’ve faced a financial disaster and had to go to extreme measures to deal with unexpected costs. Life is full of hard lessons. Learning from experience is part of growth – and it’s essential if you want to recover from financial disasters.