THIS #FEDLIFEHACK GENEROUSLY SPONSORED BY WAEPA
Expert advice from a financial planner on building resilience and managing financial hardship.
Unexpected events happen. A major home expense, family emergency and even a job loss can quickly disrupt your financial stability. For federal employees, recent economic uncertainty may feel particularly concerning. But with the right strategies and mindset, you can take control of your finances during a crisis and mitigate the emotional impact and stress related to financial strain.
Understanding the basics of personal finance can empower you to make sound decisions and weather financial storms with greater confidence. We sat down with Greg Coverdale, a certified financial planner and Director of the Wealth Management Program and Financial Literacy Institute at Delaware State University, to discuss how to handle a financial crisis, prioritize expenses, and prepare for the unexpected.
Facing a Financial Crisis: Take a Deep Breath and Analyze
If you experience a sudden unexpected expense or loss of income, Greg Coverdale advises taking a deep breath and approaching the situation strategically. “The first step that I would advise someone to take that had a significant reduction in income would be to comprehensively analyze your expenses,” he says.
When funds are limited, it’s crucial to prioritize essential expenses. This means taking a close look at your bank statements and identifying all your income sources and expenses. “Line by line, I would look at every item that’s charged to my credit card or coming out of my bank account,” Coverdale suggests. This careful analysis is a critical first step in understanding your financial situation and identifying areas for adjustment.
Remember, anxiety is a natural response to stress, and it’s important to acknowledge that. If you experience some of these symptoms, you’re not alone. Many people face similar challenges, and seeking support is a sign of self-awareness and strength. However, when anxiety becomes persistent and interferes with your ability to function effectively at work, it’s time to act and seek support.
Coverdale provides a clear hierarchy:
- Shelter: Ensure a safe and secure place to live.
- Food: Provide nutritious meals for yourself and your family.
- Utilities: Maintain essential services like electricity and running water.
- Insurance: Keep your health, life, and car insurance policies active.
“Your life insurance policy will definitely come in handy in unforeseen circumstances,” Coverdale emphasizes.
Beyond these essentials, take a hard look at your remaining expenses and identify areas where you can cut back. This might mean reducing discretionary spending, negotiating lower rates with service providers, or temporarily pausing non-essential subscriptions. Making informed choices about where to allocate your limited funds is essential during a financial crisis.
Navigating Major Expenses Without an Emergency Fund
Even with careful planning, unexpected major expenses can arise. Whether it’s a medical emergency or a crucial home repair, these costs can strain your finances, especially if you haven’t built an emergency fund. Here are some suggestions on how to navigate these challenges:
Medical Bills
Medical expenses can be particularly overwhelming and maybe even financially crippling. It’s important to be aware that many hospital payment plans are now financed through banks and private equity firms who target patients with high medical debt with interest rates reaching 27% or higher. This means you could end up paying significantly more than the original bill if you can’t pay it off quickly.
According to a 2022 story from NPR citing a KFF poll, “Nationwide, about 50 million people — or 1 in 5 adults — are on a financing plan to pay off a medical or dental bill.” These payment plans often lock you into the current price of the medical service, even if there are later price adjustments or discounts available.
When checking out of a healthcare facility, you do not need to automatically agree to the current billing. Before signing, paying anything, or agreeing to financing or payment plans, it is advisable to slow down and do thorough research regarding options that are available to you.
Negotiating Your Medical Bill
If you’re facing a large medical bill, consider these steps:
- Apply for Charity Care: It’s important to note that 30% of the population qualifies, so it is worth investigating even if you don’t think you qualify. Nonprofit organizations, like Dollar For, can assist in determining your eligibility.
- Ask for an Itemized Bill: Request a detailed breakdown of all charges. Review the bill for any mistakes. Organizations like GoodBill offer bill review services, and you typically only pay if they find errors and you achieve savings.
- Research Fair Prices: Check resources like FairHealthConsumer.org (for average prices in your area) and Turquoise.Health (for cash prices) to understand the typical cost of the services you received. Use the lowest price from each service as a benchmark for negotiation.
- Document Everything: Keep thorough records of every interaction with healthcare providers and your insurance company.
If time permits before a procedure or being admitted and you are either uninsured or not using your insurance, ask your provider for a good faith estimate (GFE) for the cost of your planned medical services and get it in writing. You can also call other providers to see how their estimates compare. If there were no unexpected events during the medical procedure and your bill is over $400 more than what was estimated, you can formally dispute the bill.
For a comprehensive list of patient advocacy resources, from financial assistance to billing advocacy and insurance guidance, visit HealthcareReformed.org.
Other Major Expenses
Major expenses beyond medical bills can also disrupt your finances. These might include:
- Home Repairs: HVAC failure, roof damage, or plumbing issues
- Vehicle Repairs: major engine or transmission problems
- Appliance Replacement: refrigerator, water heater
Navigating These Costs
When facing these types of major expenses and you lack an emergency fund, consider these strategies:
- Seek Multiple Quotes: Obtain estimates from several providers to ensure you’re getting a fair price.
- Negotiate Payment Plans: Inquire about payment plans upfront. Many contractors or service providers are willing to work with you on a payment schedule, just be aware of finance charges related to the plan as a high-interest rate option may dramatically increase the overall price of the service.
- Prioritize Needs vs. Wants: Carefully evaluate the urgency of the expense. Can it be delayed, or is it a critical need? Could a delay in addressing the issue cause further damage?
- Explore Financing Options:
- Credit Cards: While using a credit card can provide immediate access to funds, be mindful of interest rates that can dramatically increase your overall costs. If you opt for this, look for a card with a 0% introductory APR or a low-interest rate. Depending on your FICO score, you can often find cards with 15 to 21 months of no-interest payments.
- HELOC (Home Equity Line of Credit): If you own your home, a HELOC can be an option, but be aware of the risks associated with borrowing against your home equity. This includes your home used as collateral, prepayment penalties, and variable interest rates.
- Consider Personal Loans: Explore personal loans from banks or credit unions, comparing interest rates and repayment terms.
Once you have figured out the best option to pay for your emergency expense, you will need to reassess your budget to ensure you can make on-time payments.
The Credit Card Trap: Swipe with Caution
In times of financial strain, credit cards can seem like a lifeline, offering immediate access to funds when other resources are scarce. It’s easy to swipe now and worry about the bill later, effectively “kicking the can down the road.” However, this approach can quickly lead to a dangerous snowball effect, as credit card debt accumulates and interest charges compound.
The Compounding Effect of Credit Card Interest
Credit card interest compounds, meaning you’re charged interest not only on the principal balance but also on the accrued interest. This can cause your debt to grow exponentially over time, even if you’re making minimum payments.
Recent statistics paint a stark picture:
- High Interest Rates: The average credit card interest rate is currently quite high, often exceeding 20%. This means that balances can grow very quickly.
- Long Payoff Times: Even with consistent payments, it can take years to pay off a significant credit card balance due to compounding interest. Minimum payments often barely cover the interest, leaving the principal balance largely untouched.
- Impact on Credit Score: High credit card balances and late payments can severely damage your credit score, making it harder to obtain loans, mortgages, or even rent an apartment in the future.
Using Credit Wisely
While credit cards can be useful financial tools, it’s crucial to use them responsibly, especially during challenging times:
- Limit Credit Card Use: If possible, avoid using credit cards for new expenses during a financial crisis.
- Track Your Spending: Monitor your credit card balances and spending to avoid overspending and accumulating excessive debt.
- Lock Your Cards: Lock your highest interest cards via your online profile to prevent further charges.
- Pay Down the Highest Interest Rate Cards: Make a list of your cards and their interest rates and focus on paying down the cards with the highest interest rates first to reduce the impact of compounding interest.
- Consolidate Your Debt: Explore options for a personal loan to consolidate your debt from your credit cards. Be sure to research and compare loan terms carefully to find the best option for your situation. This could cut your interest rate in half.
By understanding the risks associated with credit card debt and exploring alternative solutions, you can avoid falling into the “credit card trap” and protect your long-term financial well-being.
Avoid Your Retirement Accounts
In times of financial hardship, the temptation to tap into retirement savings like your TSP or 401(k) can be strong and perhaps absolutely necessary. However, it’s crucial to understand the long-term consequences of such actions.
Withdrawing money from your retirement accounts should be an absolute last resort. Here’s why:
- Tax Implications: Any portion of a withdrawal that is not rolled over to another qualified retirement account will be taxed as ordinary income. This means you’ll owe federal (and possibly state) income tax on the amount you withdraw.
- Early Withdrawal Penalties: If you’re under age 59½, you may also be subject to a 10% early withdrawal penalty in addition to the income tax. This penalty significantly reduces the amount you actually receive.
- Reduced Retirement Savings: The money you withdraw from your retirement account not only reduces your current savings but also misses out on potential future growth through compound interest. This can have a substantial impact on your long-term financial security.
- Increased Taxable Income: The amount you withdraw is added to your income for the year, which could potentially push you into a higher tax bracket.
While accessing retirement funds may seem like a quick solution, the long-term costs can be significant. Prioritize protecting your retirement savings for a secure future.
Communicating with Creditors: Honesty is Key
If you’re struggling to meet your financial obligations, Coverdale recommends open and honest communication with creditors. “Reach out to those creditors and let them know early on what’s going on,” he advises. “You might be surprised that there are some things they can do.”
Explain your situation and explore options such as forbearance, payment plans, or interest-only payments. Many creditors are willing to work with you during challenging times, especially if you’re proactive and communicative. Understanding your options and rights can make a significant difference in how you manage debt during a crisis.
Don’t Neglect Your Mental Health
Acknowledges the emotional toll that financial crises can take. “It is important to secure your mental health and make sure you’re thinking very clearly,” Coverdale advises.
He encourages seeking support from therapists, practicing mindfulness, and journaling to maintain mental and emotional well-being during challenging times. Remember, taking care of your mental health is crucial for making sound decisions and navigating challenges effectively.
Key Takeaways
- Analyze your expenses: Identify essential and non-essential spending.
- Prioritize needs: Focus on shelter, food, utilities, and insurance.
- Medical Expenses and Billing: Research thoroughly, negotiate bills, and be aware of high interest rate financing options.
- Other Large Expense and Payment Options: Get multiple quotes and explore payment plans and financing options carefully.
- Avoid Retirement Accounts: Avoid significant taxes and missed compound interest
- Communicate with creditors: Be open and honest about your situation.
- Seek professional guidance: Consult a financial advisor for personalized advice.
- Prioritize mental health: Take care of your emotional well-being during challenging times.
Financial uncertainty can be daunting, the advice in this article reminds you to explore your options and develop a plan that identifies the best path forward.
The information provided in this piece is for your convenience and informational purposes only and not to be construed as professional advice. FEEA and its coauthors and sponsors are not liable for any losses or damages related to actions or failure to act with regard to the content in this piece.
Would you like to reprint this piece in your agency human resource, federal employee association, or union local newsletter? You can do so at no cost by contacting [email protected] with your request.
SUBSCRIBE TO OUR NEWSLETTER
THIS #FEDLIFEHACK GENEROUSLY SPONSORED BY:
MORE FROM FEEA
