If you have ever faced a financial emergency or had difficulty paying your bills, you will learn first hand the importance of financial planning and budgeting. Most income crises will come on suddenly, because you have either overextended yourself or because you face a sudden loss in your income. There are several things you can do to prevent this from happening. If you are self-employed or if you work in a volatile industry that is prone to layoffs, it is even more important to complete these steps so you do not have an income crisis, and you can continue to pay your bills each month.
1. Financial Planning and Budgeting
The most important thing you can do is to create a long-term financial plan and a monthly budget. These steps will help you stay focused on your long-term goals and prepare you to deal with some bumps in the road. Your budget is the key to preventing yourself from taking on too much debt or too many monthly payments. If you look at your budget and you know you can meet your monthly payments and you can still work towards the other goals in your financial plan. This will prevent you from being house poor, and from causing an income crisis by accumulating too much debt. Take the time each month to assess your budget and make sure it is working towards the goals in your financial plan.
2. Get Serious About Your Emergency Fund
One of the biggest things you can do to protect yourself from an income crisis is to have a solid emergency fund in place. If you have an emergency fund that covers between six months to a year of your income, you will be able to continue to meet your monthly obligations while you look for a new job. It can protect you from unexpected expenses that may come up. As soon as you can start putting away money to cover between six month to a year of your income, which will be a fully funded emergency fund. If your job is not as stable or if you have another reason why you may an unexpected expenses like a medical condition or children with a medical condition, you may want to increase the amount you put away and save more aggressively. Even if you can only start with a few hundred dollars a month, it can provide you with piece of mind and the security you need so you can focus on the other aspects of your life.
3. Stop Taking On Debt
You should also make the commitment to stop going into debt. Stop using your credit cards. Carefully consider any other payments you may sign on for, including a car payment, a mortgage or an increase in your rent. A mortgage will be necessary if you want to buy a house, but you should make sure you can really manage it before you take it on. You can avoid many income crises if you just do not have very much debt, it is easier to get by on a lot less.
4. Protecting Your Income
Another way to prevent a financial crisis is to work to protect your income. At your job you need to work hard so that you can have good references when it is time to look for a new job. You may not be able to control when you are laid off, but you do have control with how prepared you are to look for a new job. You need to work to improve your skillset the entire time you are working. Take advantage of any additional training you can get through your current job. Consider getting an advanced degree if it will help you move up within your field. If you are self-employed, you need to make sure you have multiple sources for your monthly income. You also need to constantly be on the look for new clients so you can continue to grow your income. It is important to constantly update your resume.