It’s common to feel stress and anxiety when a financial hardship hits, especially when it hits quickly and unexpectedly. Losing a job, for instance, or being unable to work because of illness or injury might have you worrying about how you’ll pay your monthly expenses or cover the cost of groceries.
Having an emergency fund in place can make hardships less stressful, but that’s something roughly one-third of Canadians lack. If an emergency fund managing expenses carefully can help stretch your money until your finances recover.
The first thing you’ll want to do if you’re going through a financial hardship is take a deep breath. No matter how overwhelming things may seem, it’s important to remember that there are still some things you have control over.
Once you’ve done that, you’re ready to move on to the next steps.
Step 1: Prioritize essential expenses
A budget is the most fundamental financial tool to manage your money. Your budget is a plan for spending each month. When managing expenses during a financial hardship, it’s important to know which ones are essential and which are not.
Essential expenses include anything you need for a basic standard of living, such as:
- Rent or mortgage payments
- Utility bills
- Groceries and food at home
- Gas and transportation
- Health care
- Child care, if you have kids
If you’re adjusting your budget to account for a drop in income, it’s important to ensure your essential expenses get paid first.
Step 2: Reduce discretionary spending
Discretionary spending is anything you spend money on that isn’t a basic need. That means things like:
- New clothes
- Gym memberships
- Streaming services
- Meals out
If you’re trying to create a bare-bones budget to cope with financial hardship, managing expenses in this category may mean making considerable cuts. The more you can reduce or eliminate altogether, the more breathing room you can create in your budget.
Step 3: Look into financial assistance
When you’ve cut your budget down, and you’re still struggling, it may be worth looking into what kind of financial assistance you might qualify for. For example, if you were laid off from work or cannot work because of an illness or injury, you might be eligible for employment insurance benefits. Food banks, meanwhile, can provide help if you’re experiencing food insecurity as a result of hardship.
If you have debt, it’s a good idea to contact your creditors to see what type of relief might be available, if any. Your credit card company, for instance, might have a hardship program that would allow you to temporarily defer payments or reduce your interest rate until you bounce back financially. Or you might be able to qualify for a debt consolidation loan, which could make your debt less expensive.
Step 4: Consider how you can create income
When a hardship slashes your income, you may have to get creative about finding ways to make more money. That might include getting a part-time job if you can or starting one or more side hustles to generate income.
You may also consider selling things you don’t need to get some extra cash. Remember, however, that selling investments at a profit might have financial consequences later if you trigger capital gains tax.
Step 5: Avoid creating new debt if possible
It’s tempting to rely on credit cards or personal loans if you’re having trouble managing expenses during financial hardship. However, taking on additional debt could make it that much harder to pay back once the hardship resolves, especially if you’re paying a steep interest rate.
Making a hardship budget and sticking to it can reduce the odds of needing to turn to a credit card to cover expenses.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.