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Understanding The 6 Reactions To A Financial Disaster

man swimming in debtAre you currently facing a big problem with family finances? Nobody wants to be in a financial disaster. If you even find yourself in one, you want to get out of it and you want to do it quickly.

While this is a natural reaction, you might want to change your perception about this. Because having a negative attitude about what is already a disaster will not help you change anything. If, like millions of Americans, you are still struggling to recover after the Great Recession, you might want to take a look at how you are reacting to the whole crisis.

The truth about your financial crisis

Here’s the thing: everyone goes through a financial disaster at some point in their life. Now your reaction to that crisis will have a big effect on how your life will turn out. If you react to it in the wrong way, you might end up in an even bigger disaster. If you react to it positively, then you might learn something new from your situation.

Looking at the current statistics in our country will not really help you in being hopeful about financial recovery. An article published in About.com regarding the US Economy revealed that the total debt in the country continues to rise. The credit card debt in May 2014 is at $872 billion – a rise from $870 billion in April. The loans are $2.32 trillion in May which increased from $2.30 trillion in April. This increase continues to disable a lot of American families because the increase in debt, specifically involving credit cards, is believed to be caused by late payments, lack of emergency funds and savings.

When it comes to financial problems, we usually think that earning more will get you out of it. While that may help you with the debt or payments that you need to make, it will not alleviate your situation in the way that it should.

6 common reactions to a financial problem

It is important to know that in any financial disaster, you have to react to it the right way in order for you to turn it into something beneficial in your life. As difficult as that may be in your current “crappy” situation, it is not impossible.

According to an article published on PsychologyToday.com, you can turn any crisis into an emotional threat or a challenge – depending how you choose to react to it. This will highly depend on how you control your emotions. The article revealed that your emotions are the heart of your response to any financial disaster. It can either be an obstacle or your source of strength to overcome your situation.

Understanding the different emotions that you will feel will help you in recovering from a financial disaster. That is because you will learn how to deal with each and every one of them. While we usually react to situations differently, we usually go through the same 6 reactions after a crisis. How we deal with each of them will determine how fast we can move forward.

Here are the 6 reactions that you need to go through as you personally deal with your financial problem.

  • State of Shock and Denial. The first reaction is usually shock and closely followed by denial. When you confront a problem for the first time, it is only natural that you show disbelief. Sometimes, even if we know the situation, being faced with the actual problem can be disconcerting. We never really know how big the problem have become unless we lay it all out. These reactions will usually delay the inevitable pain of knowing that you did something wrong in your life.
  • Point of Depression. Once you get over the feeling of shock, next come that sinking sense of depression. When it dawns on you that the financial disaster is real, it can really pull you under. Knowing that you made a mistake that led to this bleak situation is one thing. Trying to wrap your head in the reality is something else entirely. Admitting defeat is never easy and if you do not prepare for this reaction, you will lose it. Try not to stay here too long because the longer you feel depressed, the more you will be unable to act on the problem.
  • Phase of Acceptance. You should ideally breeze through the first two and go to this phase immediately. This is the first step to being proactive about your financial disaster. Once your depression is over and you have accepted the reality of the situation, this is when you can finally start to move forward. Unless you have accepted the mistakes and the problem, you can never really start the recovery process. You can find it easier to accept your situation if you try to see the good in the bad situation. Here is an interesting and light-hearted video about what you should do when things around you are falling apart. Marie Forleo discusses how you should react to a disaster in your life – which is actually applicable in any type of crisis – financial or not.

  • Stage of Analysis. Once you have accepted the financial disaster, you can now concentrate on moving forward from the problem. But before you can do that, you have to analyze what led you to this particular scenario first. Be honest about what really happened. Find out how you can got into this financial crisis. Then, identify what you did wrong and what you should have done differently. Some people skip this part over but it is an important step in your road towards recovery. If you fail to identify the mistake, then you might see yourself in this same situation again in the future.
  • Time for Rebuilding. Once you have identified the root of the problem, you can start to plan out how you will improve your finances. Will you require a debt relief program or should you just start earning more? Should your plan involve a change in your lifestyle and spending habits? These are all part of rebuilding what you have lost during the financial disaster.
  • Process of Fortification. Finally, you need to undergo the process of fortification. With what you have gained in the number 4 step, you can use that knowledge to fortify your finances to make sure that you will never be put in another compromising financial position again. Do not end with rebuilding. You need to make sure you that this is the last rebuilding that you will ever make.

How to rise from a financial slump quickly

Although rising from a financial crisis is difficult, it is something that you can do. It just takes a lot of discipline, self-control and even a bit of reflection about how you had been living your life. Do not think that it is the end of the world. You will always have hope to recover from a financial disaster as long as you are willing.

Once you have gone through the 6 reactions, you need to focus on maintaining certain habits so you can keep yourself from the mistakes of the past. In truth, going through a financial problem is not so bad – at least if you look at the lessons that you have learned because of it.

According to the Economist.com, Americans are spending less on unnecessary expenses after the Great Recession. They learned their lesson and they have identified that certain expenses have contributed to their financial fall.The average spending per family, from 2007 to 2010, fell by 3.1%. Since the average prices have risen by 5.2%, the article believes that the drop in spending is actually 8%. That is not so bad for a nation who has a reputation for overspending.

There are techniques that you can do to stay away from financial ruin and here are three suggestions from us.

  • Build up your emergency fund. This reserve money will help you get out of unexpected situations without borrowing money.
  • Investing your extra money. This is the proactive way that you can grow your money. Any extra money that you have that is outside your emergency fund should be invested. This is your way of setting up your money so it can earn you some extra income.
  • Spend your money wisely. In the end, it is not about how much money you are earning. Staying away from a financial disaster is best done by using your money wisely. Do not let your overspending lead you to another crisis.

Financial Disaster Prevention: 3 Keys To Stay Away From Financial Ruin

paper bag with BROKE textWe all know that financial management as a debt solution can work. But did you know that it is more beneficial if you use it as a preventive measure? Instead of waiting for the financial disaster to happen, doesn’t it make sense to stop it from happening in the first place?

That is what we all need to do. To prepare for the uncertain future to so we can make sure that we stay away from a financial ruin. Since it is hard to predict what will happen in the future, that is all that we can really do.

Evidence that we are not financially prepared to survive a crisis

Despite everything that we have gone through in the past few year, it is evident that we are still not as prepared as we ought to be. With all the issues in the government (e.g. government shutdown and debt ceiling) that can lead to a financial disaster, we need to start acting and we need to do it now.

A 2012 report published by the CFP Board (Certified Financial Planner Board of Standards, Inc) and Consumer Federation of America revealed that American families are still trying to get over the last recession. The report entitled 2012 Household Financial Planning Survey discusses how the struggle lies in trying to meet all the financial obligations that multiplied during the recession. Of course, we are referring to the credit payments that exploded in the height of the spiking unemployment rate. A lot of people, being unprepared as they were, had to rely on credit to buy the basic things that their family needs. Now, as the economy is also struggling to give jobs, all these debts are catching on to us and trying to pull us from the financial recovery that we want to have.

The same report cited a study by the Princeton Survey Research Associates International that showed how even in a stable economic condition, Americans are already challenged to meet basic financial goals. These include retirement, college fund, emergency savings and staying out of debt. What more if the economy is not as healthy as it should be?

The other findings of the report from the Consumer Fed and CFP Board includes:

  • Meeting financial goals became even higher in as unemployment, income levels and personal net worth all went against the favor of the average consumer.

  • In 2010, the median family net worth is $77,300 – down from $126,400 in 2007.

  • Financial planning is a vital factor in separating the people who are able to meet financial goals and from those falling behind.

  • 31% of household decisions makers have a financial plan.

  • 35% of households have a plan for emergencies.

  • Those who plan feel more confident when it comes to financial decisions. They also save more and feel that they have better progress in reaching their goals.

  • Regardless of the income group, those who plan have a higher score in terms of being financially prepared, compared to those who did not bother to plan at all.

  • 38% of families are living from paycheck to paycheck while 30% feel financially comfortable (2012).

In another study from the Employee Benefit Research Institute specifically paints a picture of retirement planning. The highlights of the study includes:

  • 28% are not confident about their retirement – an increase from 23% in 2012.

  • Retirement confidence is low because of the daunting saving goal that consumers are forced to meet. 20% of respondents believe they need to save 20% – 29% of their income while 23% need to save 30% or more from their income.

  • 46% claimed to have calculated what they will need to retire.

  • Only 2% (workers) and 4% (retirees) think that retirement planning is the priority financial concern.

  • 55% of workers and 39% retirees are admitting to having problems with the amount of debt that they owe.

The list goes on and on but the bottom line here is that our financial life is still in chaos and not everyone is planning for it. Some of us may be going through debt relief programs to help deal with debt but beyond that, we have no plans at all. What you have to understand is that a financial disaster will not spare you just because you are already struggling with your debt and finances. You need to start working on some preventive measures before bad things start happening.

3 keys to prevent yourself from financially sinking

Fortunately for you, there are three factors that can help you avert a financial disaster. At the very least, it can soften the blow in case the crisis is initiated by something that is beyond your control (e.g. stock market crash, etc.)

Changing your bad habits

The first of them is changing the wrong habits that got you in a financial crisis. These include overspending unnecessarily, not living on a budget and taking on too much credit.

In the last few years, the Bureau of Labor Statistics have noted how the average expenditure in an American household have grown over the years. In 2010, the average expense is $48,109. It grew in 2011 at $49,705. Finally in 2012, the household expense is now at $51,442. You may argue that the cost of living is steadily rising too. Well here’s proof that we are not learning from our mistakes. In the category of food expenses, we are spending an average of $3,921 eating food at home and $2,678 eating outside. Instead of just skipping the meals outside, we could save more just cooking our meals at home. While there is nothing wrong with eating outside, you need to calculate carefully how that affects your overall financial standing and that goals you are trying to reach in the future.

If you want to prevent an impending financial disaster, you have to start correcting the habits that are wasting your limited resources.

Adapt a vigilant mindset

We do not want you to be paranoid or anything but we do want you to be prepared. Having a vigilant mindset will keep you from assuming that things will always be great financially. It is not like you need to be a pessimist but just keep in mind that things can go wrong and you need to be prepared for that possibility. In every financial decision that you will make, ask yourself how you can cope with any payment involved with it in case your finances turn for the worse? What are you willing to sacrifice to keep a debt from overcoming your life? It is okay to be risky especially when you are investing to grow your money. But always do it within reason. Balance being risky and conservative at the same time.

Draft a back up plan

This is a plan that you will have in case something happens. It will tell you what to do in case your job or business goes under. This plan will tell you the type of frugal lifestyle that you will have to adapt into so you can maximize what finances you have without resorting to credit. This will help protect you and guide you even as your emotions are swirling around you. This plan will help you take one step at a time towards recovery – even before you know it. Sometimes, events leave us dazed and it helps to have an emergency financial plan that is keeping us from financial disaster.

In truth, surviving a financial crisis may be difficult but it is not impossible if you are well prepared for it. You never know what happens tomorrow so stop making excuses for yourself. You have to act now and start making these preparations.

Here is a video from National Debt Relief that we hope can help you provide a safety net for your family.

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