Create a Financial Disaster Plan

financial disaster What would you do if your financial situation unexpectedly took a dramatic turn for the worse? If you or your spouse lost a job or you had unexpected medial bills, are you in shape to handle it? Or would you have to make some tough choices?

As distressing as it might be to imagine these situations, it's far worse to face them without having a financial disaster plan in place. Debt can ruin lives; having an actionable plan in place is vital to managing and overcoming debt.

Whether you are in debt already or just preparing for any unforeseen future obstacles, developing a financial emergency plan is essential. To take control of your financial situation, your first step is to create a budget.

Developing and managing a budget

The first step for any person or family trying to get a handle on debt is to determine how much money is coming in and how much money is going out by setting a budget.

Start by listing your fixed expenses such as mortgage or rent; utilities; car, loan and credit payments; and insurance premiums.

Then list your variable expenses such as food, gas, entertainment, recreation and clothing.

A formal budget spreadsheet can help you clearly see your fixed expenses and your variable expenses, identify necessary expenses and prioritize the rest.

If you find yourself in a situation where expenses are greater than your income, variable expenses are the first things you can assess to immediately gain control of your budget.

If you find that sticking with your budget is difficult, help make your budget work for you by using these three tips:

Set aside funds for each expense category, and don't overspend.
Keep yourself accountable by writing down everything you buy.
Stick to your plan; if something is not in your budget, and you can't afford it, do not buy it.

When cutting your budget just isn't cutting it

When unforeseen expenses arise, you've cut as much as possible from your variable expenses and you still come up short on your budget, you may need to turn to an expert for help reducing or adjusting your fixed expenses. Two possible options include mortgage or loan modification and debt settlement.

Mortgage/loan modification: Loan modifications allow banks to make loan payments more affordable for borrowers. Loan modifications can be temporary or permanent changes to your loan agreement, and may include changes to interest rates, loan terms, loan balances or other parts of the agreement. To get a loan modification, call your bank and let them know about your financial situation. Criteria for loan modification vary from bank to bank, and there is no way of knowing ahead of time if you'll qualify — you just have to ask.
Debt settlement: Debt settlement is an effective means of debt reduction. To engage in debt settlement, consumers can hire a lawyer or a debt settlement company to act on their behalf. A lawyer or debt settlement company negotiates with creditors to reduce the consumer's overall debts in exchange for an agreement to meet a regular payment schedule. The process can sometimes lower debts by more than 50 percent of the balance. Only unsecured debts, such as medical bills and credit card debts, can be handled through debt settlement.

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