How to get out of a financial emergency

We all hope to have consistent, surprise-free finances. But sometimes we need to deal with unexpected events, which can diminish our savings and set our finances back.

We consider ways you can prepare for emergencies, and we look at three steps you can take to secure your finances when an emergency hits.  

Tip: If you land up in financial trouble because of an emergency, remember you can consolidate your debt.

What does a financial emergency look like?  

Sheila-Ann Robey, financial adviser at Lifeguards, an affiliate of Liberty, points out that financial issues can be caused by a variety of unexpected scenarios.

“For instance, a medical emergency could require a significant financial solution, where a medical aid plan or gap cover isn’t triggered or in force,” says Robey.

“Another example is the death of a family member abroad, which has been prevalent during the pandemic. The next of kin is required to fund the repatriation of the remains, often at quite a significant cost,” she explains.

Robey points out that something as simple as having a household appliance implode or a bumper bash while on holiday could impact a family’s financial situation if emergency funds do not exist and short-term insurance claims are processed over a longer period.

Be prepared before emergencies strike

According to Charlene Erasmus, head of the collections department and call centre at Hammond Pole Attorneys, you can avoid a financial crisis by simplifying your lifestyle and being proactive and prepared. She suggests the following.

1. Save as much as you can: Try to save a specific amount every month. You can start small, but the contribution should be increased, at least annually. If you receive an annual SARS tax refund, use it towards a savings account.
2. Budget and prioritise spending: Keep track of your spending habits, identify unnecessary expenses, and cut back on the things you don't need.
3. Invest in an insurance policy: Insurance can be expensive, but it helps in emergency cases such as job loss, divorce, natural disasters, retirement, and the death of a spouse or family member. Once again, start small, and set up an annual review with a broker to weigh up your options in terms of affordability.

What to do when emergencies hit

According to Hayley Parry, money coach and facilitator at 1Life’s Truth About Money, there are three steps you should take when an emergency comes your way.

1. Stop and take stock

When you’re in a financial emergency, it’s tempting to panic and make rash decisions. Rather, pause and take a breath.

Take a “financial health” day off if you can, so that you can take the time to know your numbers. Figure out what your current expenses are, what your savings and immediate financial needs are, and what you can adjust to cater for your emergency situation.

2. Caution and course correct

Once you know your numbers, you can start acting. Depending on the nature of your financial emergency, assess whether you have any credit insurance you can use. For example, if you have lost your job, you may be able to claim credit insurance for payments that are due.

Use your emergency fund if you need to, but try to avoid cashing in on any investments you may have. Try to avoid going into debt. If you cannot make it through the month after your debit orders have gone off, consider getting assistance with your debt.

3. Go & grow

Once you are through your financial crisis and feel like you are back on solid ground, take the lessons you have learned and use them to secure your financial future.

For example, if you did not have an emergency fund, or enough funds in it, then make that your priority to fix. Once that’s taken care of, you can focus on building your medium-term savings and then investing.

If you find yourself in too much debt, consider debt consolidation.