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Financial triage is a process that allows individuals to quickly assess their overall financial health and make sound decisions about where to focus their attention first. This process includes five steps, which include: assessing current cash and debt, stabilizing cash flow, creating a budget, focusing on decreasing expenses and increasing income, and strategizing.
Step one of financial triage is assessing current cash and debt. This step involves looking at all available sources of cash, including savings, income, and any other asset that can be converted to cash quickly if needed. It also requires an individual to take stock of all their debts, including any mortgages, car loans, credit cards, and other loans.
Step two is stabilizing cash flow. This step involves taking a look at what types of bills need to be paid each month and creating a budget that accounts for all necessary expenses. Identifying areas where you can cut back on spending, such as eating out or extra entertainment, is also important for this step.
Step three is creating a budget. This step involves determining how much money you need to pay each month and then setting up a budget that allocates the funds properly. Keeping track of your spending and maintaining a budget is critical to maintaining financial health.
Step four is focusing on decreasing expenses and increasing income. This step involves looking for ways to reduce spending, such as reducing monthly bills and expenses, or negotiating with creditors or lenders to lower payment amounts. It also involves looking at ways to increase income, such as getting a second job, taking on side hustles, or selling unused items.
Step five is strategizing. This step involves creating a plan of action for reaching financial goals. This plan should take into account any changes made in steps one through four, and should also include any investments or other wealth-building strategies that you plan to pursue.
Financial triage is a powerful tool that can help individuals assess their overall financial health and make sound decisions about where to focus their attention first. Following the five steps in this process helps an individual quickly understand their situation and make a plan of action for reaching their financial goals. By assessing current cash and debt, stabilizing cash flow, creating a budget, decreasing expenses, increasing income, and strategizing, individuals can get their financial situation under control.
Five Steps to Financial Triage
Financial triage is a concept that we may come across more often in today's difficult economic climate. It is a strategy for managing one's money with the goal of stabilizing finances and staying out of debt. Financial triage is about understanding one's current financial condition and using that knowledge to make necessary adjustments in order to start moving in a positive direction. Here are five steps to achieving financial triage:Step One: Identifying Financial Priorities
The first step of financial triage is to identify one's financial priorities. This is a crucial task that must be done in order to understand the current financial condition. Knowing one's income, expenses, assets, and liabilities will help to identify what is most important and what needs to be adjusted. This can be done by creating a budget and reducing expenses where necessary. In addition, it is important to understand one's credit score and how to improve it.Step Two: Gather Resources
The second step in the financial triage process is to gather resources. This may include seeking professional advice from financial counselors and taking advantage of the various forms of assistance available. For example, there are programs for debt relief and credit counseling that can provide help and advice on managing finances. There may also be government programs available to help with certain expenses.Step Three: Develop a Strategy
The third step is to develop a strategy for achieving financial stability. This should include a plan for reducing debt, increasing income, and creating a savings plan. A strategy should also include setting realistic goals and a timeline for achieving them. The goal should be to create a budget that works and to maintain a steady cash flow. This will help to avoid financial struggles in the future.Step Four: Implement the Strategy
The fourth step is to implement the strategy that has been developed. This involves taking the necessary actions to make sure that the budget is followed. This may include cutting back on unnecessary expenses, increasing savings, and finding ways to make more money. This process should be done regularly in order to stay on track with the goals that have been set.But then, life happens. Our income drops (because of job loss or illness) or our expenses skyrocket (because of necessary repairs or illness), and suddenly what worked before will now lead to financial malfunction. My wife and I found ourselves in this situation when she had to spend four months in bed because of pregnancy complications. Her income dropped to zero, and our medical expenses increased.
Even if you're in fine fettle, someone else's tribulations might affect your calculations. As the editor of The Motley Fool's Rule Your Retirement newsletter service, I get a lot of thoughtful email from readers about their retirement plans. Recently, a reader had this to say: "I think a major facet of retirement that has to be considered is the cost of assisted living or health care.... My wife is spending about $10,000 a month on proper lodging and care for her parents...." Wow.
So what should you do when life throws you a big-ticket curveball? Take these steps:
1. Eliminate all unnecessary expenses. Depending on the seriousness of your circumstances, you'll have to be ruthless. Quit your cable or satellite television. Cancel your cell phone. Suspend your gym membership. You need your money much more than DirecTV (NYSE: DTV), Comcast (Nasdaq: CMCSA), Verizon (NYSE: VZ), or Gold's Gym does right now. Look at your bank and credit card statements from the past few months for expenditures that you can do without, at least for a while. And, if you must, suspend contributions to investment, retirement, and college-savings accounts (though, in the latter two cases, you might end up paying higher taxes since you'll lose those deductions).
3. Contact lenders. You may be able to get a temporary forbearance on your loans. Consider this only if your financial troubles are temporary.
4. Evaluate your resources. If you suddenly need a lot more money than your paycheck can provide, you'll have to borrow money or sell assets to raise money. Which is better? Generally speaking, avoid debt. You're already in a financial hole, and taking on bigger future obligations may make it harder to dig yourself out. But, as always, everyone's situation is different. Here's a general order of places to look for funds:
If you have investments outside retirement accounts that have lost their luster, consider selling. Keep in mind the tax consequences: You'll owe taxes if you've made money, but you'll get a loss (which can offset other gains) if the investment was a dog.
Get back money you're due. If you have a flexible-spending account or have incurred reimbursable business expenses, submit your receipts. If you regularly get a tax refund, adjust your withholding ASAP to increase your take-home pay. Also, if it's tax season, get to work on filing your return.
Sell stuff you no longer need. While even a good yard sale can raise a nice chunk of change, consider getting rid of valuable stuff that you no longer appreciate. A cousin of mine made several hundred dollars selling an old piano on eBay (Nasdaq: EBAY).
If you must borrow money, borrowing against your home equity will probably provide you the lowest rate, and the interest may be tax-deductible.
The worse kind of debt comes in the form of plastic. But if you end up having to put a lot on your credit cards, play the "0% balance transfer" game for as long as lenders will let you.
5. Tap retirement funds as a last resort. Generally, withdrawals from IRAs and 401(k)s before age 59 1/2 are taxed as ordinary income, plus you'll pay a 10% penalty. Throw in the lost future growth, and that's a steep price to pay. However, in extreme cases, it's unavoidable. You may be able to get the penalty waived in some emergency medical circumstances (check with the IRS). And you can withdraw contributions to a Roth IRA at any time, tax- and penalty-free. Finally, there is the option of borrowing against your 401(k), which may be better than withdrawing the money and paying taxes and penalties, assuming you can afford to start paying it back immediately (the payments will most likely be automatically taken out of your paycheck).
Do preventive care now
If you're not currently in a financial emergency, take steps now to protect your empire against catastrophe. Getting out of debt and building a solid emergency fund are great first steps. We provide even more in our "Disaster-Proof Your Finances How-To Guide," which is a part of the Rule Your Retirement service. Give it a free 30-day trial, and you'll receive a complimentary copy of Tom and David Gardner's Money After 40.
Robert Brokamp does not own any of the companies mentioned in this article, though he did downgrade his cable package and rarely misses the 200 channels he used to receive. The Motley Fool is Fools writing for Fools.
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