If the Coronavirus global pandemic has taught us anything, it’s that you can never be too prepared for the unexpected. From severe illness to divorce to job loss, unwanted surprises can occur at any time, to anyone. Fortunately, there are steps you can take to prepare for a financial emergency before it occurs.
To help you face any obstacle or bump in the road sent your way, here are a few things you can start doing today to avoid future financial hardship.
Build an Emergency Fund
First, it’s important to stash some cash away for a rainy day. So, when an emergency does happen, you’ll have money to take care of it. While this may seem like an obvious solution, only half of Americans would be able to pay for a $1,000 financial emergency with their savings, according to a recent Bankrate study.
Ideally, you’ll want to save at least three to six months of your essential expenses. It’s wise to store this cash in an easily accessible location, such as a savings account at your local bank.
Saving this amount of money can take some time. Therefore, try to stay consistent with your saving efforts and identify different places you can cut back on your spending habits. Or, perhaps, you have some old items lying around your house that you could sell. Every little bit you save will help you better prepare for a financial emergency.
Pay Off Debt
Steering clear of debt can help you better manage a financial emergency. Not worrying about monthly debt payments may make it easier for you to cope if something were to go awry.
But, if you do have a lot of high-interest debt, you may want to shift some of your focus to paying off your debt instead of pouring all of your extra funds into an emergency account. In this case, you may want to start with an emergency fund of only a few hundred dollars (depending on your income) and then execute a plan to pay off your debt.
Two of the most common debt repayment strategies are the debt snowball method and the avalanche method. With the snowball method, you can make a list of all of your revolving debt balances. Then you pay off the smallest balance first while maintaining the minimum payment requirement on all of the other accounts. Once the first balance is paid off, you can continue to the next smallest balance and so on until all of your debt is repaid.
Whereas with the avalanche method, you make a list of your revolving debt balances, starting with the balance with the highest interest rate. Then you focus your attention on the balance with the highest interest rate while paying the minimum balance on all of your other accounts. Once that balance is repaid, you move on to the balance with the second-highest interest rate and focus on paying that off. You continue this process until all debt is repaid.
While both strategies can help you pay off your debt, find a method that works for you and will help you repay your debt the fastest.
Purchase Adequate Insurance
Ensuring you have adequate insurance is one of the best ways to protect you and your loved ones when disaster strikes. Although many people have health, life, and homeowners insurance, disability and personal liability insurance are also important policies you should have to protect your family.
Disability insurance replaces a percentage of your income if you can no longer work due to an illness or disabling injury. While many employers include disability insurance in their benefits package, it’s wise to verify you have enough coverage if something were to happen.
Personal liability insurance provides coverage beyond what your homeowners insurance and auto insurance policies provide. If you have a substantial amount of assets, a personal liability policy, or umbrella policy, is a must. In today’s litigious society, lawsuits are more common than not. Therefore, making sure you have sufficient coverage if someone were to sue you for, say, slander, would give you and your family peace of mind.
Maintain a Good Credit Score
In the event you do need to borrow funds to pay for an emergency expense, you want to make sure to maintain a good credit score. The better your credit score, the better interest rates you’ll receive on any financing options.
It could also allow you to refinance your auto loan, mortgage, or other debt at a lower rate. By refinancing, you could receive more affordable payments, making payments more manageable.
Cut Monthly Costs
Keeping your monthly expenses low can help you save more for your emergency fund or pay off debt faster. Also, this means that your emergency funds don’t need to be as big since you have fewer expenses. For example, if you have a high mortgage payment or auto payment, you may have a greater risk of a financial disaster than someone who doesn’t have such big financial responsibilities.
To cut down costs, you may want to start reviewing all of your expenses to determine if they can stay or if they should go. Suppose you have a gym membership, cable subscription, and streaming service you no longer use. Why should you continue to pay for these expenses when they no longer serve you? Contact each company to cancel your service to lower your monthly costs.
Remember, even small savings can add up. So, take a close look at your monthly expenses and evaluate where you can cut back.
Explore Extra Income Benefits
Before an emergency happens, you may want to explore resources available if you were to need them. Finding assistance programs ahead of time may ease the stress if an emergency does arise.
For starters, with so many Americans losing their employment due to the global pandemic, you may want to identify the unemployment options available if you lose your job. There are unemployment benefits available for those who qualify. Even if you qualify, these benefits can take a while to receive, so it’s smart to apply as soon as you have lost your job so you can get funding right away.
You could also look for a side hustle opportunity to ease some of the financial burdens. While this task can seem daunting at first, try looking for industries that are hiring. You may also want to learn an in-demand skill that could make you an attractive candidate for a job in the future.
Speak with Your Financial Planner
Adjusting to unexpected life events is challenging. However, you don’t need to go through it alone. Speaking with your financial planner is a great way to prepare for a financial emergency while getting the help you need. Your financial planner can help you put together a plan in the event that disaster does occur. And, if something does happen, they can provide support and help you uncover new perspectives. But the partnership between you and your financial planner goes beyond planning for an emergency; they can help you start living your best financial life—even after an emergency.
Are you’re looking for a financial planning partner who can help you prepare for a financial emergency? If so, we have financial planning offices in Redmond, Mill Creek, the Tri-Cities region, and Denver. Our firm focuses on helping retirees and those preparing for retirement achieve security by creating a solid plan.
If you’re ready to take the first step in achieving your retirement goals, our team is ready to assist you. We’ve helped hundreds of couples and individuals smoothly transition with confidence, and we’d like to do the same for you.