A Complete Guide on Financial Distress.

Estimated reading time: 10 minutes

Do you feel like you are in financial distress? Or maybe because of inflation and the talk of recession, you want to know what financial distress looks like to prevent yourself from getting into one. According to the Mind over Money survey by Capital One and The Decision Lab, 77% of Americans report feeling anxious about their financial situation. According to the Mind over Money survey by Capital One and The Decision Lab, 77% of Americans report feeling anxious about their financial situation. That’s huge. But how can you tell that you are financially distressed? Let’s talk about it.

Financial distress definition

According to Investopedia financial distress is a condition where an individual cannot generate sufficient revenues or income, making it unable to meet or pay its financial obligations. This is generally due to high fixed costs, a large degree of illiquid assets, or revenues sensitive to economic downturns. Simply put, financial distress is when your expenses exceed your income.

What causes financial distress?

Overreliance on a single source of income

When you rely on one source of income you set yourself up for financial distress. This is because, in the event that you lose your job or your business experiences loss, you might not be able to meet your financial obligations, which can be catastrophic. What happens when, because of a recession, you are laid off? When you lose that source of income you will not have a way of sustaining yourself and this might lead you to incur more debt, especially if you don’t have an emergency fund, which brings me to my next point.

Lack of savings and having an emergency fund.

Think about this for a second, do you have finances that can cushion you in the event that you cannot work or when your business is experiencing a slow season? Do you have some money stashed away to cover this? If you don’t, you could experience financial distress. An emergency fund is an account that has at least 6 months of your expenses. This ensures that in the event you cannot work or don’t have access to your monthly income you can still meet your monthly obligations as you look for a way to get back on track. This helps in the avoidance of debt.

To learn more about having an emergency fund check out my blog a Complete Guide on emergency funds.

A savings account is different from an emergency fund as it is an account where you store the surplus of your income after you have covered all your expenses, wants, etc. This account is used to save up for a specific or general financial goal. And again this is different from a retirement fund. To learn more about the savings account, check out this blog here.

Not having a retirement plan.

Again it is important that you have a retirement account. The reality is that we all get old. And unless you plan for your retirement, you will experience financial distress at a time when you really need the money especially because of age-related diseases and the fact that companies shy away from hiring older generations. You should make saving a part of your lifestyle. Have you set aside money for your latter years?

Not having a budget.

Ever heard the saying that if you don’t stand for something you will fall for anything? This also applies to your finances. Not having a structured plan for your finances will lead you down a path of aimless spending. You will not see the need to save because you lack a plan. And not only that, you will end up missing out on investments and other opportunities that would have saved you in your latter years. So again let me ask you this, do you have a budget? And if you do, do you stick to it? Again, it’s great to have a budget, but if you don’t stick to it, then what’s the point? It is like having a lamp and putting it under the bed. It helps no one.

Wishful thinking.

A bird in hand is worth more than two in the bush. This is because it is a sure bet. You see depending on finances you have yet to see is dangerous. What happens when what you are waiting for does not come through? That’s like building your castle in the air. Lottery, inheritance, etc. are not finances that you should bank on. You should plan with what you have instead. And not put your hope on something that you cannot control. What happens when someone else wins the lottery? And what happens when the inheritance falls through? Or like the founder of Hilton Hotels who left all his finances to his charitable causes. So, as you can see human beings have fickle hearts so it’s best to plan with what you have. Gambling is also another form of wishful thinking because you can lose it all. And this will leave you worse off than you were.

Falling for get-rich-quick schemes will also lead to financial distress especially when you invest a huge chunk of your money in the hopes of becoming a millionaire.

Not having health insurance.

In the event of a major illness, the cost of medical treatment might lead to financial distress. Especially if the treatment is expensive. Having health insurance helps cushion you in the event of sickness. And even if they don’t cover all, they will alleviate some of the expenses.

Unexpected changes.

Unfortunate events like the death of a breadwinner, divorce, and incapacitation can lead to financial distress. Other factors like political instability and natural disasters can also lead to financial distress.

What are the signs of financial distress?

Spending more than you earn. When your expenses exceed your income this is a sign of financial distress. This is especially true if even despite an increase in your income you never seem to have enough.

When you find yourself borrowing to pay a debt, then this is a sign of financial distress. Whether it is borrowing from a relative to pay a loan or borrowing from one person to pay another that is a sign of financial distress. Your income should always cover your expenses and even have some surplus. And when that does not happen it means you are living above your means. When your overdraft is always at the limit, that is also another sign of financial distress.

When you find yourself defaulting on bills, it is also another sign of financial distress. Paying your bills late is equally a bad sign.

Using credit to pay your bills is a sign of financial distress. Anytime you are unable to cover your financial obligation for an extended period of time it means you are in Financial distress.

Remedies for personal financial distress.

Assess your current financial obligation and your income and set up a budget.

It is imperative that you take a day to analyze your finances. You don’t need to be good in math to be effective in that. All you need to do is get your statements and your receipts and take down your inflows and outflows. List down all your expenses, you can do so in a notebook or find software and apps that help with that. If not get an excel sheet and list them down.

Having done that, you can divide your expenses into 2 categories, wants and needs. The needs represent what you cannot do without. Things like rent and utilities you cannot do without so it is a need. However, expenses like TV subscriptions you can do without so they fall under the wants category. Having done that then divide the needs into two. Fixed and variables. Fixed expenses are those that do not change. Expenses like rent or mortgage have a fixed payment. While expenses like groceries change hence they are variable expenses.

Can your income cover that and leave a surplus to pay your credit card debts? Remember the goal is to get out of your current financial distress hence there is no room for the wants right now. Desperate times call for desperate measures.

After listing down the expenses now list the loans and credit card payments. Can your income pay the minimum payments?

To help you with this, I created a budget tool in excel.

Make sound financial decisions.

Can you fix something yourself? Do it. Instead of eating out, why not cook? You can learn too on YouTube if you don’t know. Why not take a bus for some time instead of having a car? If you are renting a house, can you downsize? Sometimes these small financial changes will help you in the long run.

The more money you put aside the easier it gets to pay off your debts and the easier your financial distress gets. And again, you might consider snowballing or debt avalanche strategy to help you get out of debt. And again, you can check out my blog on a Complete Guide on debt repayment.

Hire a financial advisor or a coach.

Hiring a financial advisor or a coach can help you get your finances in order. Not only will they show you specific ways you can get out of financial distress they will open your eyes to other options like debt consolidation and other techniques that will help you find stability. After all, you can only get advice specific to you when you find someone who you can Teel your specific situations. You should never run with the general advice you get online because we don’t know your specific situation. Instead, find an advisor to help you with that. Financial advisors vary based on age, religion, financial status, etc, find one that is suitable for you.

Think about increasing and diversifying your income.

Can you get a better job? Maybe it is time you talked to your employer about a pay raise, whatever the case, you should consider it. It could be that your next move is getting a side hustle. What skill can you teach others? Maybe English? Or what digital product can you create to solve a problem? Could YouTube be the way to go? Think of all the possible ways you can make additional sources of income. After all, diversification is key. You should never put all your eggs in one basket. And remember you should not despise the days of small beginnings.

Set up an emergency fund.

Now that you know that financial distress can be caused by not having an emergency fund, it is time for you to set one up. You can just start small. It could look like you set aside the money you used to get coffee or that subscription fee you know you don’t need for the emergency fund.

Have a savings and retirement plan.

Again having a retirement plan will help you avoid financial distress. Talking to a financial advisor will help you with that. If your employer has a pension plan set for you, max it out.

Set financial goals.

initially, your financial goal should be to stabilize. Setting a financial goal gives you structure and also helps you avoid overspending. You cannot overspend when you have something you are aiming for financial plans also help boost your motivation. There is some level of achievement that overwhelms you when you realize that you have achieved your financial goals. It also encourages you to set even bigger goals. Setting financial goals is the same way as having a weight goal.

How To Achieve Your Financial Goals. (Christian Millenials)

Financial literacy and mindset shift.

Understanding your view on money will help you avoid pitfalls in the future. What is your view of money? Is money evil? Do you know sometimes the reason for poor money management is your view of money? Maybe you experienced financial trauma. Whatever the case it is important to unlearn the negative view of money and learn the positive view to help you have a healthy relationship with your finances.

Gaining financial knowledge through books, podcasts, and courses will help you gain the knowledge you need to make informed decisions. After all, knowledge is power.

Conclusion

Financial distress is a very dangerous place to be in. Not only does it lead to stress and depression, but it can also lead to divorce and family dysfunction. It is important to note that you cannot fix the problem in a day yet it took you months or years to get there. Extend grace to yourself and take it a day at a time. Slow and steady is the goal. And learn to celebrate every small win you experience.

A Complete Guide on Financial Distress.

Financial distress definition

What causes financial distress?

Overreliance on a single source of income