Life is all about change. Some changes you plan for and welcome with open arms. Others find you, whether you’re ready or not—with an emphasis on the not.
Whether it’s the nuisance of a flooded basement or the devastation of a death in the family, it’s hard to be 100% prepared—both emotionally and financially—for some of life’s unexpected events.
The one bit of good news is that more of us, thanks in part to lessons learned from the economy, are saving better. According to a recent Chase Blueprint®/Aite Group survey, about 40% of people are saving more now than they did during the recession by finding ways to cut spending.
The bad news, however, is that there’s still room for improvement: More than half of Americans don’t have enough emergency savings to cover three months’ of expenses, according to the FINRA National Financial Capability Study.
This is all the more reason why it’s critical to know what to do—and what not to do—right after a disaster. Mistakes you make when you’re in transition and vulnerable can have ramifications for years, and smart moves at a time of crisis go a long way toward mitigating the mess and helping you move forward.
So before an unfortunate event strikes, school yourself on these invaluable first steps to take if you’re ever confronted with one of these five financial emergencies.
Life Emergency #1: Divorce
When a marriage is being dissolved, you may be mending a broken heart, but you’ll also have to deal with broken finances—especially if money is a big part of why you’re getting divorced in the first place.
As angry as you may be, now is actually a key time to collaborate, says Julie Murphy Casserly, a Certified Financial Planner™ and president of JMC Wealth Management. The reason is simple: digging in your heels and fighting relentlessly about everything could cost you a lot of money and undue stress.
So you may have to decide which assets are actually worth fighting for. The big house, for example, might be too much of a financial burden when you’re on your own. So in addition to hiring your own lawyer, says Murphy Casserly, consider working with a mediator who can help keep things on track.
You also need to be prepared for all of the paperwork and administrative tasks that come with divorce. For starters, be proactive and close joint accounts, so you won’t be responsible for your ex-spouse’s spending. If you aren’t sure how many accounts you have jointly, check your credit report, as well as update beneficiary designations on any insurance policies, retirement accounts and estate plans.
And be sure to keep all important records—like the divorce or settlement decree, as well as any new paperwork showing what you own or don’t own with your now ex-spouse—in a safe place, such as a fire-proof lockbox, says attorney Leslie H. Tayne of Tayne Law Group, P.C. “Get all of your affairs in order, so you can avoid any risk of issues popping up in the future,” adds Tayne. “You may have the cooperation of [an ex-spouse] now, but you never know what the future brings.”
As you adjust to going solo in your love life, you also need to rethink your finances as a single person. Start by asking yourself what your new living expenses will be and whether your income will be sufficient to cover them. If not, think about your game plan for bridging the gap.
“Look at your finances past, present and future. Think about what debts you have to pay down, how you want to spend today and what you want your future to be in the short, mid and long term,” Casserly says. “In your post-divorce reality, start to create your desired life.”
And, most importantly, learn to let go. “Do not make the mistake of comparing your new life to your ex-spouse’s life or your former life. Don’t wonder if your ex is bouncing back faster than you are—or what his or her life is like now,” explains Mary Gresham, Ph.D., a psychologist specializing in financial issues. “This kind of thinking just keeps you tied to your spouse. Move on—make a life for yourself.”
Life Emergency #2: Natural Disasters
Mother Nature can be cruel, unleashing her fury with tornadoes, hurricanes, floods and earthquakes. If you’re lucky, you may just have to replace a few broken windows. But if you’re not, you could see your life washed or blown away in a flash.
First and foremost, it’s important to concentrate on the safety of your family when a natural disaster strikes. But then it’s time to focus on surveying any damage and losses, advises Tayne, as well as gathering all of the documents that you’ll need to make insurance claims.
You should also take detailed notes and pictures of the damage, and keep a log of everyone you speak to—be it insurance reps, contractors or government officials—since you may not be able to easily remember with whom you spoke about what. And be sure to promptly send all of the necessary information to the insurance company, so you can get an adjuster out quickly to assess the damage.
You may also be eligible for financial aid offered by such disaster organizations as FEMA, so it’s worth applying to any emergency assistance programs that you hear about. Be wary, however, of door-to-door contractors who say they’ll do work in exchange for cash upfront. Research their employer before hiring them, warns Tayne. Even better? See if your insurance company can recommend approved vendors.
And when it comes to your finances, “don’t run up credit cards before the insurance money arrives,” Murphy Casserly advises. And when you do receive that insurance check, use it wisely on repairs and rebuilding, rather than frivolous spending. “I’ve seen too many people treat the insurance money as a lottery,” she says.
Life Emergency #3: Death of a Spouse
When you lose a significant other, it’s tough enough to visualize life without your partner, but you also have to look at your financial life in a whole new way.
“If you were the spouse who didn’t deal with the financials, before you spend any money—which is often a way that we process grief—educate yourself,” says Murphy Casserly. Another smart move in this situation: Look into hiring a financial planner if you don’t already have one.
When you’re highly emotional, it’s not a good time to navigate unfamiliar terrain. In fact, most experts warn against making immediate major financial decisions, like selling the house. “It takes at least a year to fully get your bearings back, so don’t move quickly on things,” explains Murphy Casserly.
One thing that you do have to think about sooner rather than later? Your partner’s creditors. So draft a list of the creditors you owe, the amounts due and whose names the bills were in. In some cases, your partner may have had insurance to cover such debts, unbeknownst to you. Credit card or mortgage insurance, for example, could cover most or all of those debts, so it pays to make inquiries about insurance early on in the process.
If there was no insurance on these accounts, but the account is not in your name and is unsecured debt—that is, debt without an underlying asset to back it up—then you may not be responsible for it. In some cases, you may be able to send the creditor a copy of the death certificate to close the account.
With most joint accounts, you’ll continue paying as usual, but you should go ahead and ask the companies to remove your spouse’s name from the account. That said, it’s still best to seek the help of a financial professional to properly determine if you’ll be responsible for the debt. And don’t forget to inform the credit bureaus of your spouse’s death, which will help protect his or her identity from being stolen.
Finally, remember that the financial and legal to-do list is long and exhaustive during this traumatic time, but you shouldn’t deny what you’re feeling. “Grieving will take longer than you think,” says Gresham. “You are not in your right mind, [so] do not make big decisions. You need a decision-free zone.”
Life Emergency #4: Job Loss
A pink slip can surely put a black cloud over your life. What next? Find the silver lining first, says Murphy Casserly. “Most people know they don’t really love their jobs,” she says. “They stay for the paycheck—and their job sucks the life out of them. So capture the new opportunity by turning lemons into lemonade.”
Translation: Now is not the time to rest on your laurels.
So start job-hunting immediately, seek out people who are doing what you really want to be doing with your career and ask friends and colleagues to send your resume around. You should also create a list of all the things you want in a new job, like your desired commute time or ideal boss. “My clients [who visualize what they hope to attract] get exactly what they want,” says Murphy Casserly. “And the clearer you are, the faster it shows up.”
When it comes to your money, the last thing you should do when you’re unemployed is overuse your credit cards or deplete your savings. “Adjust your lifestyle or it will be a runaway train,” warns Murphy Casserly. “Don’t create debt or you will have to dig out of that hole [later]. You’ll probably be able to find small areas—like subscriptions, gym memberships or utilities—where you can start shaving expenses.”
You may also want to consider working part time until you find a full-time job, so you aren’t forced to tap into home equity loans or retirement money to get by, suggests Tayne. And for the loans that you already have, contact creditors to see if it’s possible to defer payments until you regain financial footing. Many student loan providers and some personal lenders will do this for a short time, as well as work with you to restructure your payment plan or lower your interest rate.
The key to surviving a job loss is not only the ability to re-adjust your finances quickly, but also your attitude. “You may feel ashamed and want to hide the fact that you lost your job,” says Gresham, “[but] own up to it and say you’re making a change.”
Life Emergency #5: Bankruptcy
Bankruptcy is more common than it used to be, so it doesn’t carry the same social stigma that it once did. That said, it’s important to learn the lesson.
“Bankruptcy allows you to start with a clean slate, but if you haven’t built the financial muscles to not recreate the situation, you’re likely to do it all over again,” warns Murphy Casserly.
Bankruptcy can happen due to things that are out of our control, like overwhelming medical bills or a job loss, but it’s also often the result of out-of-control spending. “We emotionally ‘act out,’ and that’s what causes us to create so much debt and have ‘spending hangovers’ on a consistent basis,” says Murphy Casserly.
Regardless of why you declared bankruptcy, focus on nursing your credit score back to health. Pull a copy of your credit report from all three of the big credit bureaus to see if any debt is still on your record, so you can ensure that they are paid off in a timely matter, says Tayne. And check to see how much your score has dropped, so you know what additional measures you need to take to raise it.
Small things can help rebuild your credit, such as taking out a secured credit card, in which you pre-fund the card with an amount that serves as the maximum limit for spending. And once you get the card, pay it off in full each month. “This means that you don’t spend more than you budget for,” Tayne says. “If you do this for a while, you may soon be approved for a ‘normal’ credit card, but be careful because you don’t want to fall into the same cycle.”
To make sure that your bills are paid on time, consider automating payments. You should also keep all paperwork from the bankruptcy for at least seven years, in case you need proof that a debt was discharged properly. And remember, says Tayne, “this is not a quick fix.” Bankruptcies stay on your credit report for seven to 10 years.
