I know a couple of people who have got into deep financial crisis. Very often, it is a result of years of overspending and not watching their finances. For example, I knew this person (let’s call him Mr A) who had a wonderful career and he was pulling in six figure salary. Then, his company downsized and he got laid off and was out of work for close to nine months. During the time when he was pulling in the six figure salary, spending was never an issue. Neither was saving! Mr A had very little in his savings account. He also took out a Home Equity Loan to renovate his kitchen.

When he spoke to me about his financial problems, he had $35,000 in credit card debt and he was close to using up his cash account. He had to come up with some cash fast. He had been given advice on what to do. This was what most people have told him.

1. Consolidate your debt with a Home Equity Loan (out of the question because he already has a HEL!).

2. Sell your house and move to a smaller place.

3. Take some money out of your retirement accounts.

4. Sell your junk and hopefully raise some significant cash.

5. Borrow from your relatives and friends.

Well, Mr A ignored most of these advice and this was what he did. Firstly, he did not want to move house. He was happy with the schools and secondly, selling and buying a house takes time. It simply does not happen in a day. He decided to put his two kids in a room and rent out a room instead for a few hundred dollars a month. This brought in some spare cash.

The second thing he did was to sell his car and buy a really old second hand car for about a couple of grand. That is a few more grand in his pocket.

Thirdly, his wife (who had been a full time housewife) found a part time job. He continued to take on consulting and part time projects.

Fortunately for Mr A, these steps brought in sufficient cash flows to pay off monthly bills. Mr A made sure he paid his bills on time and eventually set up a systematic payment plan to reduce his credit card debts. He eventually got a full time job, with lesser pay, but got health insurance. Within the next four years, he expects to be debt free. But this time, he is putting aside some emergency money.

Mr A’s action is a great illustration of steps you have to take when you run out of emergency cash. You have to do some ‘financial engineering’ and get some cash flow out of your household.

This entry was posted on Thursday, April 19th, 2007 at 1:43 am and is filed under Debt Reduction, Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.