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Personal Finance Crisis

Do Not Let a Personal Financial Crisis Destroy You

7 Steps to Perfect Personal Financial Management

What do Larry King, Mike Tyson, MC Hammer, and Marvin Gaye all have in common? A personal financial crisis has destroyed their lives. Proof that even the mighty can fail when it comes to personal financial planning. This article will help you to determine if you are nearing your own personal financial crisis. You’ll also learn how to avoid failed finances with better personal financial management.

What is a personal financial crisis?

Simply put, a personal financial crisis is when you can’t make your money stretch far enough. You don’t have enough cash in the bank to pay for that emergency auto repair. You go shopping, and your bank card gets declined. You are living from paycheque to paycheque.

Is poor personal financial management the cause of a personal financial crunch?

For most people, personal financial management is at the heart of a personal financial crisis, but it is rarely the cause. Debt is the fuel that gives financial problems their momentum, but other events ignite it. Often these are unforeseen – such as the loss of a job or a medical emergency. They can also be slow-burners, such as divorce.

Whatever the cause of your personal financial crisis, it removes your financial floor. Lack of money can cause you embarrassment and stress and severely dent your confidence.

How do you know you’re on the brink of a financial calamity?

In Canada, a financial crisis is a hot topic. According to the Office of the Superintendent of Bankruptcy Canada, the number of households filing for bankruptcy hit its highest level since 2011 in the first quarter of 2019. More than 32,000 filed bankruptcies or took Consumer Proposals to provide debt relief.

Here are four signs that you may be nearing the tipping point financially:

  1. You are feeling a little more stressed about your finances than you used to
  2. You are confused with why your money isn’t lasting like it once did
  3. You forego basic necessities to make debt repayments
  4. Your bank account is empty soon after payday

How do you avoid a personal financial catastrophe?

Whether you are near your tipping point or not, being prepared for a personal financial crisis is good personal financial management. Here are seven steps to avoid financial worries:

1. Review your spending

Overspending will cause your debt to creep higher, so it is good to understand how you spend your money. You may be surprised to learn what you spend your money on. That daily Starbucks coffee soon adds up. When you know what you are spending your money on, you can then reduce your spending.

2. Reduce your spending

Sometimes you need to be brutal with yourself or find other less expensive alternatives. Doing so can drastically cut your expenditure. Small, simple changes in your habits can make a big difference. Take a jar of instant coffee to work. Stop having lunch at a restaurant every day, and enjoy a healthier and far cheaper packed lunch. Read the news online instead of in print.

All these small savings can make a big difference in your ability to pay off your debt.

3. Review your debt

Just as you reviewed your expenditure, take a good, hard look at your personal debt. Understand what type of debt it is. Credit cards and store cards are expensive ways of borrowing money. High balances on these suggest that your spending has been out of control.

4. Take control of your debt

Now that you have reduced your spending, you should divert the savings you have made to reduce your debt. Pay down the most expensive debt first – the cards and loans that charge the highest interest rates.

As you pay down your debt, make sure that you don’t miss payment dates. Keep disciplined to avoid late payment charges by paying by direct debit.

5. Put your personal financial management plan in writing

You’ve planned to tackle your overspending. You’ve planned to tackle your debt. Now commit to this plan by putting it in writing. Make a budget. Write down your income, costs, spending, and debt payments. Keep your budget with you always, in a hidden folder on your phone.

6. Pay yourself first

Always pay yourself first, by transferring some money into a savings account every paycheque. This will help you build an emergency fund, so you are prepared for any financial emergency.

7. Rinse and repeat

Review your budget often – at least once per month or when you get paid. As your debt reduces, you will be able to pay it down even faster or save a little more. Remind yourself why you don’t have that daily Starbucks by noting your improving financial health at each review.

What if your budget doesn’t add up?

If after taking all the above steps your budget doesn’t add up or there just isn’t enough ‘wiggle room’ between your income and your expenditure, then there are ways to make sure you avoid a personal financial crisis – or eliminate the one you are in.

For example, do you have a talent or passion from which you could create a second income? Are there opportunities for overtime at work?

If your financial circumstances are still too tight for comfort, you should consider discussing your finance with a Licensed Insolvency Trustee. You will benefit from a fresh pair of eyes on your personal financial management plan, and the expertise and experience of the Licensed Insolvency Trustee.

For many people in a personal financial crisis, a Consumer Proposal is a good strategy to help rebuild finances and improve financial health. Debt payments will be reduced, and debt freedom usually comes within three to five years.

With a reasonable budget in place, a disciplined approach, and by taking advantage of a Consumer Proposal, your personal financial crisis could soon be no more than a page in your personal history.

For personal financial crisis help, contact Adamson & Associates today.

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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