Table of Contents

    How To Prepare For A Financial Crisis

    No financial crisis will knock on your door before arriving. To put it in an especially relevant context, many people were completely unprepared for an unfolding global pandemic. The blow of COVID-19 has drilled a hole in the pockets of many.

    Recent surveys pointed out the fact that this pandemic has compelled the public to borrow money or sell their assets to cover daily expenses. That is why you should always be prepared for coping with these unexpected circumstances by making smarter financial decisions. Doing so will keep you and your family financially secure regardless of the external situation.

    Expect The Worst

    While dealing with a financial crisis, you should always count on the worst-case scenarios before strategizing an effective plan. The following are some ideal tactics worth following during a recession:

    • Create An Emergency Fund - When you are in financial trouble, even the smallest amount can go a long way. 
    • Check Your Credit Card Balance - When you meet an extremely tough economic catastrophe, your credit cards can support you. It is important to not exhaust the entire spending limit on the card as it will increase your debt-to-income ratio as well as leave you without funds when you need them the most.
    • Preserve Your Standard Investment Allocation - Although borrowing against retirement funds is possible, it is good practice to hold onto investments and continue contributing regularly to portfolios during a crisis.  Only liquidate if it is absolutely necessary. Though sharp changes in markets can feel traumatic, this will help ensure you don’t lose out on the power of compounding returns over the long-term.

    Know Your Options

    There are options available for borrowing that don’t require you to liquidate investments or create a setback for retirement planning. Among the options, here are some of the popular alternatives:

    • Explore Personal Loans - People with good to excellent credit scores can opt for personal loans ranging between $1,000 to $50,000 with affordable rates and flexible terms. 
    • Consider Credit Cards With Promotional Rates - Not all, but a few credit cards offer 0% APR for selected periods. Given these credit cards don’t charge any interest for a length of time, usually ranging between 12 to 15 months, they can be extremely helpful during unexpected financial crises. 

    In addition to exploring these financing options, this is the best time to practice diligent financial habits to maintain your credit score. Accordingly, always pay the minimum credit card payment. If you don’t make ontime minimum payments, it will negatively affect your personal credit score and reduce the availability of credit.

    Additionally, find areas for savings if possible. When you can sense that conditions might be challenging for the long haul, it is important to start focusing on savings. Try cutting frivolous expenses and channeling those extra funds into a savings account.

    Understand Timeframes

    Financial hardship can have a long-term impact. Hence, it is extremely important to plan your steps. Here are a few things of note:

    • The Lasting Effect Of A Financial Crisis - As per the National Bureau of Economic Research, a financial crisis can on average linger for almost 11 months. The lasting effects can be moderate to mild, depending on your individual situation.
    • Great Depression - The Great Depression that occurred in 1929 lasted over five years before the economy stabilized.
    • Great Recession - In the case of the Great Recession that appeared in 2008, the situation began stabilizing around the end of 2009.  
    • Troubles In The Current Pandemic - With the global economy at a standstill, it is next to impossible to estimate how long it might take for conditions to stabilize. Thus, you need to devise a robust plan to save enough for unexpected situations that are beyond your control.

    What If It Is Already Too Late?

    If you don’t have enough funds, you might want to apply for one or both of the relief measures provided by the Federal Government in response to the COVID-19 pandemic:

    1. As per the CARES Act, you are now eligible to withdraw up to $100,000 from your 401(k) accounts without penalty charges. If you complete the repayment within three years, you are eligible for additional tax rebates.
    2. If you have 401(k) loan accounts, you can borrow 100% of the vested balance or a maximum of $100,000. Usually, these loans are to be paid off over five years, but under this Act, you can delay the payment by one additional year.

    Bottom Line

    No one can 100% accurately predict the future. Therefore, having a plan to address the worst case scenario is the safest bet. During a pandemic or other natural disaster, conditions can rapidly spiral out of control. Thus, you must be prepared on all fronts, especially financially. You shouldn’t rely on loans and credits alone, but instead devise a financial strategy and save as much as you can for unexpected situations. 

    Before borrowing against retirement, try to concentrate on the other temporary financing options discussed first. Above all, bear in mind that you need to be borrowing wisely to ensure you don’t end up in deeper trouble.