5 Ways to Avoid a Financial Collapse

August 8, 2013

It can be difficult to be faced with financial collapse. When you find yourself considering bankruptcy, you might wonder how you got to this point. It’s not always completely your fault, either. From medical bills to unexpected events, there is a chance that personal financial collapse is around the corner.

In order to reduce the chances that you will find yourself facing a personal financial collapse, here are five actions to take:

1. Pay attention to your financial situation.

The first thing you have to do is honestly evaluate your financial situation. Look at where you’re at. Are you spending more than you earn each month? If you were to experience a medical emergency, would you have the resources to make up for the fact that you might miss work? Are you ready for a natural disaster?

Look at where you stand with your finances in terms of debt, assets, and general financial readiness. Knowing where you stand is the first step toward shoring up your finances so that you can avoid a financial collapse down the road.

2. Purchase adequate insurance.

If you can, purchase adequate insurance. The right insurance policies can protect your assets and keep you from becoming financially devastated in an unexpected situation. A good health insurance policy can ensure that you can better afford the costs associated with a medical emergency. Home and car insurance policies protect expensive items, allowing you to replace them Â without breaking the bank. Even life insurance can help your family avoid financial collapse if you suddenly pass on. Make sure that your assets are protected so that you don’t have to devastate your finances replacing what you’ve lost.

3. Pay down high interest debt.

High-interest debt drains your wealth away, reducing your available resources. As a result, it’s important to pay it down if you want to shore up your financial situation. When you carry a lot of debt, it puts you in a precarious situation. It means that you have fewer options when an emergency forces your hand. When you have debt already, unexpected expenses can push you over the edge, becoming the straw that breaks the camel’s back. Pay down your high interest debt, and you will be better positioned to handle financial emergencies.

4. Build your emergency fund.

A good emergency fund can help you get through tough times and avoid financial collapse. When combined with proper insurance policies, an emergency fund can help ensure that you keep the cash flow coming, even if you are sick or injured and can’t work, or if you lose your job. While your emergency fund won’t completely save you, it can help take the edge off. Your emergency fund can give you breathing room and help you prevent financial collapse.

5. Continue developing your skills.

No matter your situation, you can benefit if you are willing to develop your skills and keep on learning. If you have a marketable skill, it is easier to find a job after you are fired. The right skills and knowledge can also help you start a side gig, or even a full-blown business.

The right investing knowledge can help you build a good emergency fund and prepare for a prosperous retirement. Keep developing your skills and knowledge, and grow as a person, and you’ll be better prepared for a number of setbacks, and even be able to keep yourself from complete financial collapse â€“ especially if you combine your continued growth with the other actions listed above.

What do you think? How do you prepare yourself to avoid financial collapse?

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Miranda writes about personal finance almost every day. An experienced freelance writer, she's covered your money online and in print from every angle and is always looking for new ones.

Teetering on the brink of financial collapse is never a good situation to be in. As you rightly point out steps can be taken to avoid such a situation, especially the emergency fund! Its something that has tided me over the rough patches and gives me a “fighting chance”!
Great post

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About Ben

I'm Ben Edwards and I've been addicted to personal finance since I was 12 years old.

That passion for money has paid off for my family - so in 2006 I founded Money Smart Life to help you afford the life that you want. Read My Story...