An unforeseen event can sometimes alter our finances drastically. Hence these 10 useful tips for weathering the storm and overcoming a financial problem.
The life of Diane Tremblay (fictitious name) took place without major concern. A lifelong lover, a challenging, high-paying job in marketing, and tons of projects in mind. But one day, the 50-year-old began to suffer from muscle pain. Far from easing, the suffering increased to the point of becoming unbearable, forcing Diane to stop working. After numerous medical consultations and a battery of tests in various hospitals, the verdict is in: multiple sclerosis, an autoimmune disease for which there is no cure.
As a self-employed person, Diane had no group insurance or disability insurance. To make matters worse, she couldn’t receive anything from employment insurance, having not contributed to it for years. Result: in the space of a few weeks, Diane lost all her sources of income. Following this shock and in order to survive financially, she found herself, reluctantly, entirely dependent on her lover, in addition to being physically in bad shape.
Diane’s case is far from rare. Personal finance surprises can happen to anyone. All it takes is a separation, job loss or illness – the three main causes of a financial problem – to sow chaos… in spite of ourselves. “People who find themselves in poverty are not lazy,” explains Éric Lebel, licensed insolvency trustee and partner at Raymond Chabot Grant Thornton. Often, they experience an exceptional situation that causes them to lose control of their budget.
However, such scenarios are more and more frequent, because we tend to use credit in abundance to improve our quality of life. “Consumers being more vulnerable than ever, a drop in income or an increase in expenses, even temporary, plunges them into great financial difficulty,” notes Éric Lebel. How, then, do we avoid disaster or regain control of our finances when everything goes wrong? Experts share their tips with us.
1) We build up a nest egg
While everything is in good shape, we accumulate an emergency fund that will allow us, in the event of an unforeseen event – such as moving after a breakup – to meet our needs while we get our finances back on their feet. “Everyone should ideally have a cushion of three to six months of income,” explains François Bernier, director of advanced planning techniques, wealth management, at Sun Life Financial. This money will ensure the transition period between the old and the new life.”
2) We avoid using our credit cards
Their interest rates are indeed prohibitive, underlines François Bernier. “We must succeed in our transition by avoiding over-indebtedness. Otherwise, we are only postponing the problem to a later date.” To pay emergency expenses, it is better to use a personal or mortgage line of credit. However, you must have subscribed to it (and above all not have used it) BEFORE the glitches. Otherwise, the financial institutions will refuse our request, even if we have had a good credit rating for half a century. Because the banks lend to customers who have the means to repay them and not to people without income and riddled with debt. Oftentimes, you will need an accountant to guide you through financial forecasting and business financial advice. CPAs in the US have successfully taken the US CPA exam.
3) We think before we act
It might be tempting to do something impulsive to get out of trouble. Like putting up a “For Sale” sign in front of our house a few days after a separationTo avoid losing thousands or even tens of thousands of dollars, it is better to stay calm. “We’re taking the opportunity instead to review our financial situation,” recommends Natalia Sandjian, senior director and head of planning at the National Bank.
4) We keep our feet on the ground
Living in denial while trying to keep up appearances can be expensive! “Some people try at all costs to keep the same lifestyle, noted François Bernier. They want to show those around them that they are in control of the situation. However, there is no shame in losing your job! Corporate restructurings are commonplace. We are also not immune to illness or separation.
5) We review our expenses
Drawing up a new budget is essential in order to recover from a financial shock, warns Éric Lebel. “We are doing a very short-term one, scrutinizing each expense in order to know exactly where our money is going. We take the full measure of our lifestyle.” Writing everything down on paper helps reduce financial stress, adds Émilie Laurin-Dansereau, budget advisor at the Association cooperative d’économie familial du Nord de Montréal: “That’s where you see superfluous expenses, those that can be cut without too much pain.
6) We cut certain things… while keeping our spirits up
To see clearly, we divide fixed expenses and discretionary expenses into two columns. The former, which are more difficult to compress, include housing, food, electricity, transport and basic clothing. Discretionary spending responds more to wants than needs. They include dining out, travel, impulse purchases, $5 lattes, beauty salon treatments, and platforms like Netflix or Spotify. Doing without these latest entertainment tools may seem unthinkable. But they are expensive. “People don’t realize the astronomical sums they spend on subscriptions each month,” says Natalia Sandjian.
Besides, axing everything that is non-essential is not necessarily a good idea either. By sacrificing our pleasures, we are less motivated to want to respect our new budget, explains Ms. Sandjian. “Expenses may be considered superfluous by some, but essential by others. It’s up to everyone to review their priorities. Thus, Diane Tremblay has not stopped drinking wine regularly with her lover, despite the cost of good bottles. “It helps me keep my spirits up,” she says. However, I cut back on visits to the hairdresser and moisturizers. I endure my gray locks and my wrinkles!” (laughs)
7) We accept to make sacrifices
Some decisions are more difficult to make, like saying goodbye to our SUV or our motorcycle, on which we dreamed of crossing the country. “If we rented a luxury car, we should consider terminating the lease, advises François Bernier. Even if it entails high costs on the spot, we can save thousands of dollars in the long term.