Have you ever had more bills to pay than money to pay them and had to decide who wasn’t going to get paid that month? Have you ever encountered a medical emergency or job loss that has completely impacted your family's well being and finances negatively? Have you ever found yourself in a position where you were unable to properly feed yourself and/or your family? I call this being in survival mode. It's not just trying to make it to the end of the month, but it's choosing between eating dinner and having a place to live. If this sounds like you or someone you know, then you're going to want to read on.
If you are in survival mode because your life has gotten out of control (like a medical emergency, job loss, or some major disaster has hit your family) then I have some suggestions to get through it. You must change the way you think about managing your money and paying for bills for this period of time.
In survival mode, you need to take care of your basic necessities which are housing, utilities, food and transportation. This is what many financial experts call "The 4 Walls."
You need to pay for these items to take care of your own health and well-being before you even think about paying off your credit card bill or even meeting the minimum payment. Chris Hogan explains the 4 Walls clearly in this video “Hope Now (1/4)” (he was my Master Financial Coach teacher through Ramsey Solutions).
Will your credit score be negatively impacted? Yes. Yes, it will. But the more important question here is, "should I dwell on it?" And the answer to that is no. No, you shouldn't stress about your credit score going down.
Having a roof over your head and food on the table takes precedence over paying for your credit card bill.
If you default on a secured loan, like your house or your car, those items can be taken away from you. But, if you miss payments on your credit card they won’t come and take back the things you bought. How could they? You ate the food already and wore the clothes; there is no value in those items.
Secured loan - the borrower (you) pledges some asset (like a car, boat, or house) for a loan
Unsecured loan - a loan is issued to the borrower (you) based on your creditworthiness (how likely they think that you will pay them back)
If you default on your credit card, it may increase the interest percentage rate, it will show up as a late payment on your credit report, and you will pay a late payment penalty on top of the interest you already were accruing for the unpaid balance. But, you have several months before ‘they’ (the credit card companies) turn over your debts to a collection agency. You may need that time and money to make sure that you and your family can survive.
Thinking about cutting costs? Well, don’t even think about stopping your insurance policy to save
some money on those payments! Survival mode is not the time to drop your health or life insurance. An uninsured trip to the ER can be thousands of dollars.
And, even worse, can you imagine how devastating it would be to already be in a crisis and then to lose a family member and not have the benefit of insurance to help out with costs? To help replace that income? That would be a terrible spiral for your family to deal with on top of the grief. I've seen it happen and it is not pretty.
Am I saying that it’s ok to default on your loans just because you don't want to pay them? No, I’m not. It’s absolutely not OK. You spent that money and you have an obligation to pay. But, you have a bigger obligation to take care of the livelihood of your family first.
Ideally I would weigh 20 pounds less and you wouldn't have any debt. But since we are discussing crisis situations and survival mode, now is not the time to waste talking about the past behaviors that brought you to your current situation, whether it's overly using credit cards, taking out extra loans, or eating too many sugar cookies!. I want to get you through this rough spot by making sure that you put your money in the best spot to help you to SURVIVE!
Once you have paid for the 4 Walls (housing, transportation, utilities and food) start compiling the information on all that you spend every month and then evaluating each item as either a want or a need. Then, you should compare what you are spending in each category to this chart of recommended percentages.
With the money that you have remaining after paying the 4 Walls, you can decide what to pay next. In survival mode you need to make sure you are not spending money on luxuries or wants, but limit spending to needs and make sure they are a reasonable percentage of your budget.
For example, housing is one of the 4 Walls, but if you are spending 50% of your monthly income on it, then you have an unsustainable housing situation.
If you receive $5,000 per month but spend $2,500 per month on your rent or mortgage, it is no surprise that you are having trouble paying the bills. At this monthly income, your housing cost should be $1,250 - $1,750 (25-35%).
You just can’t afford to pay 50% of your income for housing because then you don’t have enough left over for the other categories.
The solutions to this scenario is to find another housing location, share the costs with someone, or find a way to make more income. (see How to Make Money on the Side, and How to Profit from your Clutter)
You can get through this. And, you can help someone you know get through this. Take a deep breath and look at the numbers as though they are not your numbers! Don’t focus on the past mistakes but look forward to your financially fit future.