Preparing for Unexpected Financial Situations
We are certainly living in unprecedented and uncertain times. It can be tough to know what is coming next week let alone next month. However, even in the best of times, life is unpredictable. There are always unexpected financial situations that could occur at any moment. Your car could break down and need a major repair, your refrigerator could stop working and need to be replaced, or you could become ill or lose your job. These scenarios, and others like them, often happen without warning. So, how can you prepare for something unexpected? If you don’t know what’s going to happen or when it’s going to occur, how can you get ready for it?
Here are some tips.
Have an Emergency Fund
One of the best ways to prepare for an emergency is to have enough savings to deal with one. An emergency fund should be in a relatively easily accessible account (such as in a savings account rather than in a mutual fund or other investment) so it’s available when you need it. If you have a sudden expense, you don’t want to have to wait for an investment to mature or cash out earlier than you expected.
How much should you save in your emergency fund? The amount will vary depending on your situation. If you are the primary earner in your family or if you work in a field where it will likely take a while for you to get a new job, you should aim to save six months of expenses. This means you should have enough saved so you can live off of your savings for six months.
Some people may be able to get away with an emergency fund of only three months, while those who live off of a single income may want to have more saved (perhaps up to a year of expenses).
If you don’t have that much saved, don’t panic. Start building up slowly over time and grow your fund each month. Put a category called “emergency savings” into your budget and pay yourself each month.
Check Your Insurance
Life insurance, health insurance, and other forms of insurance are important. If something were to happen to you, would your family be able to cover costs and life expenses? If you became ill or were injured, could you afford your medical bills? Consider your insurance needs and get a policy that works for you.
Have an “Emergency Budget”
Consider putting together an “emergency budget” that you’ll use if something unexpected happens (like a job loss). When something bad happens, it can be tough to think clearly. If you prepare a budget that involves reducing costs and only spending on the necessities, you’ll be able to put it into action right away without too much thought when you need it.
In your emergency your budget, you’ll want to reduce your spending drastically. Cut out anything that isn’t an absolute need and avoid spending on any unnecessary expenses. This budget won’t be something that you’ll want to live off of for a very long time, but it could be something that could save you if you end up in an unfortunate financial situation.
It’s a good idea to avoid debt in general. You want to make sure you do not borrow more than you can afford to repay, since this can lead to potential debt problems. However, in challenging economic times, bills that were once affordable can become difficult to deal with. This is why it’s important to pay off your debts quickly, if possible. By paying off debt now, when you can afford it, you’ll save yourself from dealing with high debt payments in the future.
Not only will reducing your debt make it easier for you to afford your monthly expenses, but you’ll also save money on interest.
To reduce your debt, look at all the debts you have. Figure out how much you owe on each one. Then rank your debts by how much they are costing. Credit card debts are usually some of the costliest debts to carry, since most credit cards have relatively high interest rates.
Once you know which debt is the most expensive, focus on paying this one down first. Whatever extra money you have each month, put it towards eliminating your costliest debt. Once that one is paid off, focus on the debt that is now the costliest and carry on until all of your debts are paid.
Ideally, you will want to focus equally on debt repayment and saving for emergencies, but how you approach the situation will depend on your specific financial circumstances.