For many people, financial problems seem to hit them out of the blue. Something suddenly goes wrong and all of a sudden, they are knee-deep in debt, and sinking fast.
But it turns out there are numerous ways to be proactive and ward off financial problems. Taking the right approach can help you avoid issues indefinitely. Here’s everything you need to know and do.
What you can expect in this article:
Plan For Crises
First, you’ll want to plan for inevitable crises. You are likely to be hit by at least one financial storm in your lifetime, and possibly many. Job loss, medical expenses, and school fees are all extremely common hits to your wealth that occur over time.
You can plan for crises by identifying sources of support. Build your network and look for people who can help you if you get into trouble financially in the future.
Also, start planning today. Begin investing in assets you can draw down on in case of emergency.
Be Tax Compliant
You can also ward off financial problems by ensuring you remain tax-compliant. Taking the time to understand the rules and follow the regulations helps to avoid audits, investigations, and fines.
If you don’t know how to remain tax-compliant, talk to a professional. Accountants can ensure you pay the proper amount of tax and can back up all your returns with documentation and a paper trail.
Don’t Fall For Lifestyle Inflation
Another way to ward off financial trouble is to avoid lifestyle inflation. Try to live the same way you always have, even if your income increases substantially. Don’t fall into the trap of believing the good times will last forever, or that your income is secure. Avoid spending the additional money in your pay packet and, instead, filter it into your savings or investment account and give the extra money time to grow. Don’t immediately move out of your existing apartment to somewhere bigger just because the bank is willing to tender a bigger loan. That’s not a sustainable approach.
Get Regular Financial Checkups
At the same time, it is also helpful to go for regular financial checkups. These evaluate your current financial health and the trajectory you are currently on. Financial advisers can explore your situation and recommend changes to your plan, as required.
You can change your financial plan in numerous ways, but each will have a significant impact on your lifestyle. Setting the goal to earn a higher income, for example, means you’ll need to focus on your career and give up some aspects of your lifestyle, including perhaps your weekends. If you reduce the amount of money you want to save, you will feel the pinch in the future as you’ll have less money to play with as you get older.
Financial checkups can tell you the pros and cons of all your decisions. Ideally, you want to move towards effective saving and investments but that might not always be feasible.
Add Multiple Income Streams
Another way to ward off financial problems is to develop multiple income streams. Instead of putting all your eggs in one basket, you should look for ways to earn alternative incomes.
The most proactive people try to earn income from four separate sources:
- A regular salary or wage
- Dividends or returns from stock or bond investments
- Income from property rentals
- A side gig
You won’t be able to build all these income streams immediately. However, you will have over five to ten years or so of working. Separate your efforts into various areas one by one. Focus on starting an investment portfolio, growing it to half your annual income. Then, switch to saving for a deposit for a rental property. Start earning income from that and plough the profits back into your other investments. At the same time, look for alternative work opportunities in the gig economy to supplement your income.
You can also ward off financial trouble by shopping smart. Negotiating and seeking discounts can reduce the impact of inflation and help you keep more of your money to secure your financial future.
Look for the best prices online. Use price comparison tools for all your bills to see if you are getting the top deals.
Don’t be afraid to change your provider if you feel you could benefit from lower charges elsewhere. New customers always get the best offers, regardless of whether they are paying for car insurance, utility bills, or the internet.
If you are involved in a negotiation, look for ways to provide the opposing party with value instead of just asking them to reduce the price. Ask them what you could exchange with them for a better deal. Companies are always looking for opportunities to ]increase their profits and benefit from a transaction.
You should also learn continuously about everything related to your economic life. For example, learning more about your career can help in career development, assisting you in earning higher positions and climbing the corporate ladder. Likewise, learning about personal finances can help you understand how finances work and the steps you need to take to thrive.
Learning continuously can also spark new ideas. You might see ways to improve your job security or find roles that pay more money.
Another way to ward off financial problems is to invest diversely across various asset classes. Avoiding putting all your eggs in one basket reduces the risk of catastrophic loss. Even if a specific stock performs badly, your portfolio is still likely to do well as a whole.
In particular, invest in uncorrelated assets. These are assets that won’t automatically rise or fall if that happens with the rest of your portfolio.
Finding these assets is substantially more challenging than it was in the past, but it is still possible. Comb through datasets looking for investments you can make that don’t move with each other. This practice will increase your risk-adjusted returns and let you make more money long-term.
Ensure You Have Proper Insurance
You should also ensure you have proper insurance to protect against unexpected expenses. Having the right cover helps you avoid massive payouts in the future.
Look at the risks you currently face and the coverage available to you. Check that your insurance policies cover your potential losses.
For example, if you have healthcare, check that you get coverage for the conditions you are likely to develop in the future. Ensure you’re paying your premiums for a reason.
Also, check your home insurance contents policy. It may not cover certain valuable items, such as expensive bicycles, that are highly desirable for thieves.
Another technique to avoid financial catastrophe is to start budgeting. Tracking your income and expenses tells you how much it costs to live in your current abode and whether you can afford any financial mishaps without getting into serious financial trouble.
Ensure you track your spending and stay within spending limits. Try to avoid using excuses like “living for the present” to justify higher spending.
Manage Your Debt
Finally, take time to ensure you are managing your debt properly. Letting it build up too much could make repayments unsustainable, preventing you from paying it back in the future.
The best way to manage your debt is to avoid using credit in the first place. However, if that’s not possible, you might want to consider consolidating it or negotiating with lenders.
If the money you owe is unsustainable, bankruptcy might be the best option. It helps you escape years of paying interest while freeing you up to save and invest more.