Financial Shocks: What You Need to Know

 

Financial shocks are events that result in unexpected expenses and they are especially challenging for individuals and households with limited resources and tight budgets.

Examples of financial shocks are plentiful and include the following:

 

- Big spikes in expenses due to inflation (e.g., childcare, food, insurance, rent, utilities)

- Car accidents

- Disability

- Divorce

- Large home repairs (e.g., roof, furnace)

- Large out-of-pocket medical or dental bills

- Loss of a job

- Property damage due to natural disasters

- Reduced income (e.g., fewer work hours or loss of a side hustle)

- Unexpected funeral or family caregiving expenses

- Unexpected travel expenses for medical treatment, a funeral, or caregiving

- Vet bills for a pet

- Widowhood

 

Financial shocks are typically not an “if,” but a “when” because life happens. Fortunately, there are ways to prepare for unexpected financial shocks and make yourself more financially resilient and better able to handle them. Resiliency resources include the following:

- Adequate insurance (auto, disability, health, homeowners/renters, liability, and life)

- Emergency fund equivalent to at least three months of essential living expenses

- Low debt (high outstanding debt makes every financial shock worse!)

- Marketable job skills (e.g., certifications, degrees, and work experience)

- Strong social capital (e.g., family, friends, church, community and government agencies)

 

Below are some steps to take when you experience different types of financial shocks:

- Apply for available benefits (e.g., unemployment, SNAP, life insurance beneficiary payout)

- Earn additional income, if possible (e.g., second job or “side hustle” freelance work)

- Get professional assistance (e.g., financial counselor or planner, lawyer, government agency)

- Redo your spending plan (budget) to reflect changes in income and/or expenses.

- Seek information from reputable unbiased sources (e.g., Cooperative Extension and public libraries)

 

Need more information? I was happy to contribute to content of this recent NerdWallet article about ways to recover from an financial shock.