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Coping with financial tragedy

As you strive to achieve financial goals, it's common to overlook the potential for major financial setbacks -- even though they can strike without warning and often can't be prevented or controlled.

But you can take certain steps to minimize their impact.

These plan-wreckers come in many forms such as disability, job loss, business failure, divorce, and death of a spouse.

Would you have enough income or resources to survive a financial setback? Is there money available and resources in place if something were to happen tomorrow? It's important to be prepared, rather than trying to pick up the pieces after the damage is done.

Picking up the pieces is exactly what Joan Price had to do. In 1995 the freelance health writer, speaker, and fitness professional was in an auto accident that caused extensive injuries to her legs, forcing her to stop working for six months. While her own unpaid bills mounted, she was required to pay large medical bills for the other party before the insurance company would settle her case and reimburse her. Price was financially devastated.

"I didn't have a financial cushion," says Price, author of "The Anytime, Anywhere Exercise Book."

"I borrowed thousands of dollars from friends who, fortunately, were able and willing to lend it to me. I got in debt for the first time in my life and hated it."

Let emotions subside
If you find yourself facing financial turmoil like Price, your first reaction likely will be emotional. You'll worry that money will run out, or you won't find another job or land on your feet from a divorce. Worry is normal, but if you find yourself in a crisis, financial experts urge you not to make quick decisions.

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"Do not take any action right away," says Sheryl Garrett, founder of Garrett Planning Network in Kansas and the author of "Just Give Me the Answers," a consumer financial book. "There is so much emotion involved in any traumatic event. Calm down, step back and take a good financial assessment of your situation. Take inventory to see what financial professionals you may need to get involved." For example, if your spouse died, you may need to contact an estate attorney or, if you are divorcing, an attorney with divorce experience.

Check existing resources
Perhaps your situation isn't as bad as you think. A savings account may help to pay bills. A marketable skill may help to get another full- or part-time job. An insurance policy might cover you after an accident and help you get on your feet. You won't know until you analyze your financial statements.

Ask yourself: Have I set aside enough funds in a checking or savings account to cover at least six months of bills and daily living expenses in case of an emergency? Can I convert my accounts to accessible money without being subjected to stiff financial penalties? Can I surrender an insurance policy or liquidate investments?

Also, ask yourself if all of your money is tied up in investments or accounts with a distant maturity date. You may have savings or investments, but if they are not liquid, they may not help you immediately.

However fuzzy this financial snapshot may be, it's a start.

First things first
Now that you know how much money is available, maximize its use. Before you pay bills, set priorities. For example, you might want to use savings and other assets to help pare down debts, but without any income, your savings may need to cover daily living expenses.

"The most important thing to be concerned about is paying the bills in the short run," says Russell Wild of Global Portfolios, a fee-only financial planning and investment firm in Allentown, Pa. "If you have a nonretirement and a retirement account, rely on the assets in the nonretirement account first and hold off cashing out on retirement plans as a last resort to prevent penalties and other fees."

 

 

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-- Posted: July 2, 2004
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See Also
Building an emergency fund
Should you keep the house in a divorce?
7 ways to avoid going naked on health insurance
Financial advice glossary
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