A financial emergency seems impossible until it happens to you. An emergency fund can do a lot to get you through the rough patches but sometimes you don’t have an EF or your financial emergency is more protracted.
The good thing about such financial emergencies is that they always seem much worse than they are and they never last as long as you’d expect.
The worst thing that you can do during a financial emergency is go into more debt, raid your retirement stash, or panic and make even worse decisions.
FINANCIAL Emergency Lockdown
Don’t spend a penny of your money unless you absolutely have to as soon as you realize you’re in a financial emergency or about to be in one. This is the single most potent advice I can give you.
Hold on to every dollar – don’t spend it thinking that things will recover quickly. Definitely don’t spend it to deal with the emotional stress of the situation.
Even worse, we might try to spend our way out of the problem. This might be the case if you hire a lawyer and then another lawyer, and then pay a consultant instead of doing the one right thing which will get you out of the problem.
Let Loved Ones Know
Let everyone around you know that you need to cut your spending. Extended family and friends don’t need to know. But close family and friends will require a more personal touch – “Hey just wanted to let you know that I have a major financial emergency so I’m going to need to be a little frugal these next couple of months – hope we can still socialize but obviously I’ll have to make some financial decisions. Thanks for understanding.”
If someone asks “Okay, but you’re still coming with us on that camping trip right because we’re counting on you” then you likely have a selfish person you are dealing with – might be as a good of a time as any to cut them out of your life.
Getting Advice
You will be offered advice, solicited or not. Understand that it comes from a good place. But if you are a financial extremist like myself, only a few people will be able to offer you good advice.
The rational and calm individuals are the ones you want to listen to. Anyone who panics more than you is probably best avoided.
Stop The Bleeding
The first step of an emergency financial lockdown isn’t to hustle to try to earn more money. Not only is it likely that the income has dried up but also because it’s the least efficient way to address a financial problem.
Imagine, you’re a physician and you lost your medical license. Or you’re a therapist and you are on suspension by your professional licensing board. You are a pharmacist who got fired. Or you’re a surgeon with a sudden back injury.
These aren’t ideal circumstances to try to earn more money. Cutting expenses will be a far more effective strategy.
Excess Spending
It’s important to cut any unnecessary spending to leave room for necessary expenses. Think lawyer fees or travel expenses.
Food, housing, and transportation. These are the main categories and everything else can be cut out.
Cancel vacations, cancel medical conferences, stop dining out, don’t buy expensive wine, and skip the car wash for now. We get into a routine with our habits and forget that we can cut these expenses.
Legal Fees
There are 2 situations where medical professionals can financially exsanguinate, a divorce and medical-legal matters.
In both of these situations it’s common to let our emotions and ego push us to spend way more than necessary. It doesn’t help that others egg us on to ‘fight for justice’.
Life isn’t a movie and you’re not Mel Gibson in Braveheart. Life’s too short and too beautiful to spend it tied up in a legal battle or a courtroom.
Sometimes it’s good to stay and fight but other times, especially when lawyers are involved, it might just dig a bigger hole in your pocket. It’s easy to lose another $100k in legal fees with the same exact outcome.
Figure Out Income Sources
For a medical professional who loses their license it will be impossible to earn money doing what they did before. If you were an anesthesiologist or ER doctor and your medical license got taken away then you won’t be setting foot inside a hospital as an MD.
You might be able to petition to have your license reinstated after about 3 years but that’s still quite some time away.
Income for Peace of Mind
If you cannot earn money as a dentist or surgeon or psychiatrist then there isn’t going to be anything else that’s going to be financially worthwhile to pursue in the short-term.
But having even a couple of hundred dollars coming in every few weeks will drastically reduce your stress.
Credit Cards
All of us medical professionals have those $25k and $50k credit cards which send us cash-out offers. It might be tempting to take that $25k and park it in your account – ‘just in case’.
I advise against this. I’ve done this before and unfortunately it just made me more comfortable spending more. It compounded the problem because it added the extra layer of debt stress.
Finally, when the problem was said and done I still had the debt to deal with which was salt on the wound.
Retirement Accounts
You can start accessing your retirement accounts but there is often a penalty which is minor – 10%. The bigger downside is that accessing this money prevents it from being able to continue growing tax-free.
Financial hardship withdrawal allowances are often low, maybe $10k and determined and regulated not by the IRS but your employer’s plan details.
Investments
Never treat your investment savings as an emergency fund. So if you suddenly need $30k to pay a lawyer then it wouldn’t be a wise financial move to cash out your investments unless your investments are there for the purposes of financial emergencies.
Investments earn you profits and these profits are definitely fair game. If you have stocks, bonds, or real estate then start figuring out ways to make them generate you an actual income – whether passive or requiring some of your time and effort.
Rental Income
I want to address rental income because physicians often live in very nice neighborhoods and often have excess space in their homes. This space can be rented for extra income.
You can get as creative as hosting a foreign student from another country which can be quite lucrative or you can simply rent out a spare bedroom.
For some of us it might make more sense to move out of the house and find a temporary renting situation that’s cheaper. This might be moving in with a friend or family member until the dust settles.
Unemployment
Remember that you can file for unemployment. You are limited to a lifetime of unemployment income of 5 years. However, each unemployment episode can be nearly 2 years long.
I wrote a post about unemployment income and it’s not terrible – you can probably get around $2,500/month which obviously won’t pay your mortgage but will get you by in the meantime.
Disability
Filing for disability won’t apply to most doctors but if you already had a health condition you were battling then it’s possible for your current financial emergency to exacerbate it.
You also get to have access to your retirement accounts without the 10% penalty if you are on disability.
Don’t be too prideful or too clueless to skip past disability as an income source. You don’t have to be on disability permanently and if it helps you get back on your feet then you are using it exactly how it was designed.
Cut Your Spending
Anything you do routinely becomes a habit. The same is true for spending where you might think that you cannot live your life unless you have a gym membership, your morning coffee, or your crappy protein shake.
Housing
Even if you have a mortgage you can apply for a hardship deferment. Do it right away, don’t wait until you get a bill and have to deal with the stress of it.
If you are dealing with a permanent financial matter then selling your home should be a perfectly viable option, followed by renting the cheapest and safest place possible.
Renting is hard when you’re unemployed but a private landlord will make exceptions if you can show that you have savings or investments that can back you up. Larger corporate apartment complexes will want you to be employed and have 3x your rent in monthly income.
Food
We complicate food but we don’t need but 2,000 calories a day to live a healthy life – most of us need much less.
A few bananas, some bread, rice, a few root veggies, and some lettuce can keep you quite healthy. Get fancy and add in beans, lentils, and carrots and you’re good to go.
For most of us it’s going to be alcohol, coffee, and dining out which are the priciest food items to cut out. Transitioning off of these will sucks for about a week and then you’re good to go.
Transportation
Park the car and don’t drive it. Don’t make drastic decisions like selling the car but if you have a hefty car payment then it might make sense to pare down to one vehicle or trade for something without a payment – not easy when you’re dealing with a financial emergency.
You can even register the car as Planned Non-Operation and won’t have to insure it or pay the full registration price.
You might live in a city like Las Vegas, Phoenix, or LA where you cannot get around without a car. But you don’t need a leased vehicle either. If you are in other cities then using Uber or public transport and a bicycle might be the right option for you.
If you aren’t going to be commuting any longer and will be driving a lot fewer miles then consider switching to an insurance service that charges you by miles driven or at least call your insurance company and tell them that your annual mileage will drop drastically.
A scooter or motorcycle is never a good idea in a US city. But an electric bicycle might be the ideal alternative for you.
Exercise
Easy, cancel all your gym memberships.
If you have a sport that’s expensive then switch your activities to some urban cardio. Running, walking, biking, push-ups, dips, etc.
Online Memberships
Netflix, Amazon Prime, UpToDate, Spotify, Pornhub and cable TV are all easy things to cut. Okay, no, they aren’t easy but it’s something you’ll adjust to quickly.
These memberships are hard to track down and you will have more online memberships than you think. The best trick is to cancel your main debit or credit card and have the bank issue you a new one. This will bring forth all the companies who are billing you cyclically and then you can cancel each membership one-by-one.
Healthcare
Medicaid!
Our patients use it and we treat them. So before you go saying that Medicaid sucks remember that you’re the one treating some of these leeches.
Except you’re no leech. Medicaid was meant to help those who are in temporary financial need and not to abuse it indefinitely. So use it, temporarily, until you get back on your feet.
You can get approved for Medicaid incredibly quickly – you’ll be amazed at how easy it is and how quickly the gov’t will offer it to you. If you’re having problems then track down your hospital’s social worker or go to your local library where you’ll get quick access to social services.
The Library
Free books. Free streaming music. Free internet. Free computers. Free tax services. Free social service advice. Free magazines. Free newspapers. Free DVD’s. Free place to sit and do work with heat.
Action Steps
- Cancel your main credit cards and debit cards to reset your many memberships
- Look through your bank account to see if there are any direct debits, cancel if unnecessary.
- Cancel any vacations, flights, conferences.
- Cut out coffee, alcohol, and dining out.
- Write a grocery list as outlined above – limit yourself to cooking only with those items.
- Cancel health insurance and immediately get on Medicaid.
- Walk in to your local Social Security office and apply for unemployment if appropriate.
- Start filling out disability paperwork if you think you can qualify.
- Pool all your cash into a savings account and don’t touch it.
- Call all credit card, mortgage, and auto debt lenders and let them know you need to defer payments.
- Inform close family and friends that you have a financial emergency and need to cut spending.
- Mobilize your investments and start drawing down profits wisely.
- If you have real estate consider renting out any portion of it that you can.
- For a more protracted situation sell the cars and sell the house. Move to the cheapest part of your state/country.
Prepare Now – Before It Happens
Most of us won’t experience the kind of financial emergency that requires a full lockdown. Once it happens to you then you will have wished to be prepared for it.
A financial emergency can be tackled much easier if you have no debt, don’t have an expensive lifestyle, have multiple income sources, and have enough invested that you could live off of the proceeds.
Income Sources
Some income sources take a long time to establish. You’re not going to be able to write a book and make money on it right away. But if you are the writer-type then get that manuscript done and at least you can throw it at a bunch of publishers and get a small advance.
You won’t be able to start an auto-mechanic shop from scratch during a financial emergency but if you have developed your auto mechanic skills then you can always go work for a company or do some mobile mechanic work.
If you have a knack for teaching then advertise some tutoring services in your area. As a medical professional it shouldn’t be hard for you to get clients for math, chemistry, physics, and biology.
You might be great at handyman work. Getting a license takes only a couple of days and you can advertise your services to your neighbors and earn some quick money right there. But you need to have developed your skills ahead of time.
Emergency Funds
Don’t make the mistake I made. Have such a fund available to you and don’t feel any guilt in tapping into it when the time comes.
Sure, having $30k sitting around collecting dust and losing value seems wasteful but studies show that by just having this extra level of security helps you make better decisions.
Debt
I got a text yesterday from my friend V. who is a lawyer just 5 years out of practice and she just paid off all her student loan debt. She’s debt-free. She earns less than $60k a year but she has a very impressive net worth because she spends less than what a person pays in rent.
You can negotiate with mortgage banks, car loan lenders, and credit card companies but if you don’t have this debt in the first place then it’s one less thing to worry about.
Reacting to Loss of Income
When you are financially secure and debt-free then you will react very differently to financial emergencies which might result in your loss of income.
If you’re a physician dealing with the medical board, like myself, then their threats and bullying tactics just don’t seem as austere. You will be evaluating your response to the matter not based on your financial needs but how worthwhile it is for you to pursue the matter.
If you are spending $2k a month and you lose all your income sources as a physician and have enough in investments to cover that income then what real fear is there? What financial emergency took place? All you need to do is adjust to the new shift in your lifestyle paradigm.
Believe me, it feels great to be able to give the medical board or an employer the middle finger when they are overstepping their bounds.