Tell me if you’ve been here before. You finally feel like you’ve got your money system going well, you’re just starting to pull ahead, and then BAM, a personal financial crisis hits: the transmission in your car fails, or your air conditioning breaks, or like me last week, your pool system fails.
Guess what? A financial crisis is a good thing for your financial muscles. This momentary crisis is an opportunity for you to step up to the world and say, I can meet this challenge. I can learn. I am enough. Although it’s harrowing in the moment, a financial crisis presents opportunities for you to kick ass and gain some serious confidence.
Most people faced with a random $400 expense can’t pay for it in cash, much less a $1,000, $5,000, or $10,000 one (myself included in the last category). But what do you do when the storm hits? Do you whimper and put the unforeseen expense on your credit card and say I’ll figure this out another day?
No! You thank yourself for all the financial pushups you’ve been doing and dive in to generate some more money, and see what you can learn from the situation. Do you have kids like me? They’ll be watching how you handle this situation. It’s a great time to teach them some financial strength.
How You Can Manage and Prepare for a Crisis
You can be better prepared for a money crisis by understanding your cash flow in a bit more detail. First and foremost, you should look to your flexible cash flow—money that is not required to be spent on mandatory expenses like your mortgage, cars, food, and utilities. Knowing your monthly flexible cash flow is critical to being able to make your first move. Don’t know what it is? Here’s a sample spreadsheet for figuring out how much extra financial muscle you have each month:
Once you know how much you have to work with, you can immediately spray that flexible cash at the problem like a firehose. If you’ve got lots of flexible income, problem solved and you didn’t even have to dip into an emergency fund. Of course, this means you do not spend that money on totally discretionary purchases you might otherwise make until your cash flow recovers. A little bit of discipline for a short period of time can keep you out of debt. And getting control of your cash flow is the fast track to debt freedom, and eventually financial freedom.
If you don’t know where your money is going each month, I strongly recommend using Personal Capital (affiliate link) to help you keep track of each purchase and get a sense of where you stand. It will categorize each purchase for you and put them in a pretty chart like this:
But what if you check out your cash flow and you don’t have enough to cover the surprise expense? If you have an emergency fund, now’s the time to break the glass and use that cash. If your flexible cash flow and emergency fund are depleted and you still need more money (I’m sorry—this must be really serious), then it’s time to make more money!
Alternative Ways to Fund the Crisis
One of the secrets of wealthy people is that they are constantly on the lookout for new ways to create revenue streams that will give them greater financial flexibility. They don’t just go to their day job, take their paycheck, and think “well that’s that, one source of money seems just about right!”
Training yourself to start to see opportunities for earning more money and taking advantage of them proactively can help you whether your goal is to manage a crisis, to get out of debt faster (yours truly), or to become financially free sooner. That more people aren’t doing so is why most people will never be rich. (Luckily you are not most people since you’re reading this blog.)
Selling stuff lying around your house is just one option. There are tons of different ways to make extra money on the side. Chris over at Money Peach has put together a great list of 68 side hustles to help bring in some extra cash — these might be starting your own blog, picking up gigs on Craigslist, cleaning other people’s pools (easy and lucrative, if you know how!), or other freelance work. You might even consider becoming a sperm donor or an egg donor, which apparently pay surprisingly well — up to $1,000/month!
Obviously this is going to take a little extra effort on your part, but working a bit more to stay out of debt is way, way better than getting sucked into a debt black hole by being paralyzed by the crisis.
My $900 Crisis
Here’s how I handled my own most recent money crisis. When my pool broke, I knew we needed some extra cash even if I installed the replacement system myself. (I did it!) I was faced with at least a $900 bill that I had to figure out how to pay. Although our regular flexible cash flow was mercifully close to covering this expense, we still needed to come up with at least a couple hundred extra bucks to keep things level. Although I picked up a quick $100 for some consulting work related to my real job, we needed more of a buffer. I started looking around the house for things we could sell.
Two years ago we bought my son a real drum set. He used it for maybe six months, and then it sat in a closet unused for over a year. It was a pretty nice set (we paid $500), so I thought, aha, here is something we can shed painlessly and bring in some extra cash. We got the extra cash, but boy was I wrong about the painless part. My son (now age 7) was extremely upset about the prospect of getting rid of his drums, which he described in the moments before the Craigslist buyer showed up as “one of his favorite things!!” When I pointed out he never used them, he proclaimed that he “would use them now!”
I wasn’t sure what to do. On the one hand, I knew he hadn’t used the damn things for over a year, but at the same time he seemed to be extremely emotionally attached to them. A big part of me really wanted to call the whole thing off and let the kid keep his drums. But another part of me wanted to teach him that holding onto stuff just because you like the idea of having it isn’t very practical, and that when things go wrong, you need to figure out how to solve the problem. And that might involve the pain of giving up something you like but never use.
In the end, I decided to keep the sale on. After the buyer handed me $180, I went to talk to my son. He was still upset and holed up in his room. I asked him to count the money, which he did. He seemed impressed to be holding such a big chunk of cash in his hand. Then I asked him to go outside with me and look at the new pool system I had just installed. My son loves the pool and swims every day, sometimes several times a day. It’s one of his actual favorite things. I reminded him of that, and he readily agreed he loves the pool.
And then I asked him how much he thought replacing the pool system cost. He said maybe $200—just $20 more than what he was holding in his hand. When I told him it actually cost over $900, he looked really surprised. I explained that sometimes we can’t have all the things we want all the time. And that I would much rather give him a functioning pool that he can use every day than hold onto a drum set he almost never uses. It seemed to click for him. We went for a swim after that, and I haven’t heard about the drums since.
What about you? What financial muscles do you use to weather a crisis?