Many things can cause you to fall into a financial hole in life. Examples include:
- Sudden car, housing, or medical expenses
- Reckless spending due to a mental health condition
- Changes in the economic environment where you live, including inflation
- Job loss
- Divorce or marital breakdown
- Losses from the stock market or gambling
When these events occur, they can leave you feeling bewildered and dazed. When you run out of money, you start running out of options.
Fortunately, digging yourself out of a financial hole is more straightforward than you might think. Yes, it’s always painful at the start, but once you start taking control of your finances, things get easier.
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Face The Reality
The first step is to face reality. You need to examine your finances with a clear mind.
Start by asking whether you can recover from your current situation or if you need to go down the bankruptcy route. Sometimes, the debt you owe is just too high to pay, so insolvency is your only option.
When this happens, it is advisable to work with a licensed bankruptcy trustee. You should have professionals by your side who can guide you through the process and decide which option is best for you.
Alternatively, you may find a way to improve your financial situation by selling assets, cutting back on unnecessary spending, or increasing your income temporarily. These options can also be effective in certain situations.
Start by gathering all your financial documents, bank statements, and bills in one location, and write down your current financial position. Ultimately, you should have a figure that indicates your net worth.
If your net worth is negative, it means that you’ll still owe money, even if you sell everything you own. These situations are unfortunate, but you can still escape them if you have a steady income.
If you can use apps to keep track of your net worth, that’s helpful. These can show you where you are now and where you can expect to be in the future.
Create A Bare-Bones Budget To Dig Out of a Financial Hole
Once you’ve done that and taken account of your situation, the next step is to create a budget that gives you just enough money to live on. This indicates whether your financial situation is sustainable.
If it isn’t, then you can:
- Look at whether bankruptcy is an option
- Consider selling assets like your home to clear debt quickly
Ideally, of course, you’d like to maintain your present situation, but that’s not always possible. Sometimes you have to make hard decisions in the short term to recover over a longer time frame.
Talk To Your Creditors
Talking to your creditors is, of course, always an option. Sometimes, you can negotiate better deals with them to make the debt more repayable.
Remember, it is in their interest to avoid you declaring bankruptcy, because in that situation, they won’t receive any interest payment from you at all, and they could lose the amount they lent to you by law. This gives you some bargaining power and allows you to ask for a lower interest rate on the debt you owe that you can afford.
Remember, creditors aren’t entirely innocent here because they were the ones who thought you could afford the repayments. What’s more, when you go to most lenders, you aren’t using money that other people have deposited.
Instead, banks create loans and then demand that you pay them back through legal mechanisms. There isn’t a finite supply in a conventional sense.
If you have high-interest debts, negotiate them first. Point out why they are unaffordable and use an advocate to back you up in communications.
If that doesn’t work, use a legal representative or a trustee to discuss bankruptcy with them. Say that it is a risk and that you need lower payments to pay off the debts.
Explore Consolidation
When you opt for negotiation, banks may offer you the consolidation option. This approach to paying off debts is most effective if you already own a home.
The idea is simple: pay off all your existing debts and then roll them into a new loan secured against your home. This way, you can pay a lower interest rate and make monthly payments more manageable. You can also automate direct debits so they leave your account when new money enters.
Debt settlement services are another option, but be cautious of the fees associated with them. The cost of assembling these loans can be high, so only consider reputable providers.
Only use consolidation methods if you feel confident in your ability to stop adding to your existing debt pile. If you continue to accumulate debt due to lifestyle expenses or bad habits, it is advisable to explore alternative solutions first.
Increase Your Income: To dig out of the financial hole
If you can increase your income, that can help even more and allow you to pay off debts and other expenses one at a time. Taking on a second or third full-time job is an excellent option for many people, especially if you’re the sort of person who can work around the clock.
Working smarter also works. For example, you could invest in activities that provide the highest return and avoid those that drain your time and energy. You don’t want to be in a situation where working is making you feel exhausted because you’re simply trying to put in the hours. If there’s a shortcut, take it.
If you don’t have any skills, pick jobs that don’t require you to tire yourself out. For example, desk jobs or factory work where you sit and push a button are great examples to dig yourself out of a financial hole.
Cut Your Expenses To The Bone when in financial hole
If you’re in a financial hole, you also want to cut your expenses aggressively. Don’t leave anything on the table.
For example, you could:
- Wash clothes by hand and leave them on the line to dry
- Cook at home instead of ordering expensive take-out meals
- Use public transport rather than driving a car
- Drive down bills by using less water and electricity
- Try not to spend on clothing or other non-essential items for a couple of months
Applying these techniques individually won’t significantly impact your budget. However, together they can have a significant effect, leaving you far better off than you were before.
Ask For Opportunities At Work
If you have a job, you can explore whether there are opportunities to earn more money at work. Even small changes to your arrangements can have a dramatic impact on your finances and leave you significantly better off.
For example, you could ask if you could come in on weekends and cover some additional shifts. Or you could request to take on a large project. Some employers will even provide you with an advance or give you a promotion when required.
The critical point here is that you don’t know unless you ask. Perhaps your work can’t give you extra money, but there might be jobs you can do on the side for colleagues.
Avoid New Debt as you dig out of the financial hole
Of course, while you’re in the process of digging yourself out of a financial hole, you should take care to avoid new debt. Adding what you owe buries you in a deeper hole, making it even harder for you to get out of it.
Cut up your credit cards if possible, or freeze them for a period if not. Rely on cash and ensure your bills go out of your account on the day you get paid to help you avoid temptations.
Prepare For Setbacks
As you embark on the process of digging yourself out of a financial hole, prepare yourself mentally for setbacks. Remind yourself that things will almost certainly go wrong and that it’s unlikely you’ll make it through to the other side without a problem.
Setbacks can come in various forms, but once you have some prudent financial basics in place, they have less of an impact. For example, even if you lose your job, it doesn’t matter as much when your expenses are low. You may also experience declines in your investments, but you can often wait these out, and things will eventually recover and improve.
Plan For The Future
Finally, when digging yourself out of a financial hole, plan for the future. Ensure you adopt long-term habits that will serve you well over the next ten to twenty years.
For example, squirrel away money in your savings accounts. Get accustomed to the idea that you will never have access to the funds they contain.
Also, consider adding to your work pension if you have access to one. Investing in this will ensure you have more capital available in the future.
Even taking a look at your career can help. If you’re in a dead-end area, then transitioning to one with better prospects could serve you well, even if the starting salary is lower than you’re used to making.
So, which of these tactics might you try to get out of a financial hole?