Definition: Financial Shock
Financial shock can be defined as an unexpected event that affects a person’s finances negatively. Emergency expenses such as shock utility bills, home repair and car repair bills are some of the most common causes of financial shock. Such expenses are bound to disorganise your finances if you don’t have adequate savings to cover them. This highlights the importance of setting up an emergency fund as soon as possible.
Emergency expenses can force you to deplete your savings, borrow from friends and family as well as take up short term loans like payday loans. To avoid over-reliance on such measures which usually cause more financial stress, you need to build an emergency fund. Ideally, you should have six months worth of living expenses or more in your emergency fund. If that’s not the case with you and you are in financial distress because of an emergency expense, it’s not the end of the world. Here’s what you need to do to recover.
Step 1: Acceptance
To tackle any difficulty in life, you must accept your situation first. Acceptance is important because it helps you tackle the root cause of your problem. Every financial difficulty can be avoided by taking some measure earlier in life. Acceptance will help you see where you went wrong. For instance, you may realise you didn’t have enough savings, good insurance, etc. Instead of wasting time feeling sorry for yourself, accept and spring into action.
Step 2: Assess your situation
Once you accept your current situation, proceed and find out how much resources you have and the liabilities you face. You need to know your exact financial health to get out of financial distress and formulate a realistic plan. You should find out your total monthly income, expenses, and debt. Do you have payday loans, credit card debt, car loans, etc.? You should also find out how much you have in assets. It’s also important to know the short term and long term implications of the financial shock you have faced, if there are any. For instance, you may have taken out a loan to settle an emergency expense. What are the repayment terms?
Step 3: Set your goals
After getting the true picture of your current financial situation, it’s time to set goals aimed at getting you out of the situation. The goals should be specific. After assessing your current situation, you should know how much money you need to get out of your current financial situation. With this in mind, you should have goals detailing how you intend to make the amount of money you need to get out of debt. Your goals must be realistic otherwise you will never be able to recover from the financial shock. Your goals also need to be measurable. To do this, break up large goals into small manageable steps. The idea here is to be completely honest with yourself and ensure you achieve whatever you decide to do to make your financial situation better.
Step 4: Formulate a plan
With clear, realistic and measurable goals in place, you should be able to formulate a good plan. When planning, you need to know where you will get money for paying outstanding debt. You can consider getting another job or adjusting your budget. In most cases, there are expenses you can forgo to pay up outstanding debt. You can also create new income streams by moving to a cheaper house, selling an asset, using public transport, etc. After suffering financial shock, you need to cut down on unnecessary spending otherwise you won’t recover. Your plan should focus on this without putting too much pressure on significant expenses. Don’t forget to include an emergency fund in your plan.
Step 5: Take action
All the steps discussed above are useless if you don’t take action. You must make those lifestyle changes and pursue your goals religiously to recover. Most people dream about improving their financial situation, but nothing changes until you take action.
Recovering from financial shock starts with acceptance. You must also assess your current situation to identify your mistakes. Proceed by setting goals and formulating a plan that will take you out of your situation and protect you for in the future. Lastly, you need to take action. You can’t get out of financial shock if you don’t do anything to change your situation. Become debt free, build an adequate emergency fund and take up the necessary insurance coverage to protect yourself in the future.
Is the Company Director of Swift Money Limited.
He oversees all day to day operations of the company and actively participates in providing information regarding the payday/short term loan industry.