financial decision making

Adjusting Budgets for Unexpected Life Events

In the past few months I have been a little frustrated with the progress of my financial situation. Due to a few unexpected life events, I’ve had to deal with a few cash flow issues which took me out of my financial comfort zone. In addition to a temporary loss in revenue, I also had a few large and unexpected bills that I had to pay. This situation had a substantial impact on my day-to-day activities as I wasn’t able to implement my financial plan as I usually do.

Despite my temporary financial situation placing me at unease, I was prepared for it and made it through relatively unscathed. The experience reminded me of a few financial management words of wisdom and three important personal finance concepts.

Being Prepared is Critical

All of us will be affected by changes in our financial situation regardless of location, culture or material wealth. However the impacts of unfortunate life events and their subsequent financial hardships will vary significantly between families. More often than not, the difference between critical and negligible impacts to your finances will be based on your level of preparation.

Being prepared for a financial emergency starts with having an understanding of your financial risks. Taking an inventory of your financial risks will help you avoid them and adequately prepare for them if and when they occur, this is also known as risk management for financial planning. The best way to understand your financial risks is to make a list of life situations that can affect your ability to earn income and all potential large expenses (vehicle maintenance, medical procedure, etc.).

While insurance is a great way to offset the financial impacts of certain life events, your insurance policies will not cover everything. This is why a safety fund is so important. Having 3 to 9 months of your salary saved for a financial emergency will help you deal with a tough situation.

Keep Your Attitude in Check

Mental attitude is an important factor when it comes to dealing with stressful situations. This is especially true when considering the impact of financial constraints on your emotional state and lifestyle. It’s natural to become frustrated and lose hope at times, however don’t let your emotions dictate your financial decisions.

The most important element of savvy financial decision making is keeping your emotions in check. One of the best ways to clear your mind and make logical decisions is to understand everything about your situation.

To bring clarity about your financial situation, begin by determining how long your new financial situation will last. Next attempt to calculate how large the financial impacts will be on your budget. These two pieces of information will help you determine what changes you will need to make to keep your finances under control.

Making Lifestyle Changes

Once you have a checked your emotions and measured the financial impacts of unexpected life events, you can begin to plan how you will get through this tough situation. More often than not you will have to change your lifestyle to reduce your monthly expenses and remain under budget.

Making lifestyle change is difficult, however it's often necessary. The easiest way to remain under budget is to make a list of all of your priorities from most to least important. Next you should assign the cost of each priority (i.e. monthly car payments), then go down the list and scratch the ones that you can’t afford, starting with the lowest priority first.

This is the easiest way to adjust your lifestyle and budget without causing too much turbulence in your daily life.

Adjusting budgets due to unexpected life events is a challenging, yet often necessary, endeavor. When facing an unexpected life event that creates a financially challenging situation remember to check your emotions, understand your situation and strategically reduce your expenses.