A financial crisis can occur on a personal level as well as a business level. Either way, they can be devastating, which everyone should think about before this type of situation occurs. Nobody likes to think about negative things, but life can change in an instant. It may only take one financial crisis to take a person from being financially stable into dire financial straits.
Common Causes Of A Financial Crisis
There isn’t just one specific thing that can cause a financial crisis. There are several that can occur or even a combination of them. Some of these are:
Loss of Employment:
No matter how hard someone tries to find employment in a stable industry, things can go wrong. For example, an industry that is doing really well may get to a point where there is no longer a consumer demand for what they are offering. Or the market has become flooded. Or new technology has rendered them mundane. All of these unforeseen circumstances will usually result in layoffs. The individual who is experiencing this can be in a challenging position. If they have worked in this industry for a long time, they do not have other skills that will allow them to find work in other sectors. Their only recourse now is either to take a general low paying job that requires no skills. Or to opt-in for re-training. Both of these are going to affect finances.
This is another circumstance that can dramatically affect the finances of both parties. It can be due to equalization that can leave one individual financially insecure more so than the other. Investment may have to be split, and alimony payments may become an additional expense.
There are times where individuals become so financially challenged that they can no longer handle their debt. This leaves them no alternative but to file for bankruptcy. An action that will affect them for several years going forward.
A health crisis can be one of the quickest and most devastating hits upon an individual’s personal finances. Most often, there are medical expenses that mount up. Then there is the possibility where the individual may not be able to return to work for an extended period of time, and income becomes greatly reduced or non-existent.
The Financial Situation
How dramatic of an effect these causes of a financial crisis will be all depends on the individual’s financial stability at the time of their occurrence. Being aware of them can help to really reduce their impact should they arise.
For loss of employment, it would help to ask the question, “What would I do if I lost my job tomorrow?”. Now may be a great time to plan for this in the event it became a reality. One way would be to start a special savings fund that would meet the needs. For example, putting away enough money to cover a six month period of unemployment. Also, adding to this money that could be spent on training. This is a great contingency plan. So if the current living expenses are $2,000 a month, then the plan should be to have $18,000 saved, covering a six-month period. Then added to this would be a substantial amount for training. If this plan is implemented immediately before there is any threat of loss of employment, the savings could be accumulated over two or three years. This same concept can be applied to preparing for a health crisis.
In the case of divorce, nobody wants to plan for this because they don’t want to think of it as a possibility. However, it is important to be realistic. In this case, many couples will do a marriage contract or a prenup. This can make a big difference in warding off a financial crisis.
For bankruptcy, the best way to deal with this financial crisis is prevention. It means making sure that individuals do not overextend themselves financially when enjoying good financial times. Refrain from mounting up bills that require monthly payments. A good example is credit card debt. It is easy for this to get out of hand when someone is financially secure. It is often one of the leading factors when it comes to having to file for bankruptcy.