While many people are familiar with saving strategies for the long term, some forget to have an emergency fund for sudden, unforeseen circumstances that could arise. Being financially prepared to handle emergencies can put your mind at ease by ensuring that you have the necessary funds to stay afloat should something serious happen.
When you disaster-proof your finances, no matter what trouble you face – whether a family crisis, a hurricane, or a job loss – you’ll be able to weather the storm.
Let’s look at the most effective ways to disaster-proof your finances.
Improve the State of Your Finances
When you’re prepared for an emergency, you’re better able to respond and adapt effectively. Start by considering your financial situation: examine your income, savings, investments, and net worth. The majority of people could improve their financial health if they were honest with themselves about the reality of their income and spending habits.
Consider the following tips to improve the overall state of your finances:
- Maintaining a responsible budget is essential. Understand your monthly household income and how that money is spent. Whenever possible, find ways to cut costs. Eliminate unnecessary purchases and expenses. Tighten the belt on discretionary spending. Think about different ways to save more money.
- Every month, save some of your income and invest it. Plan and track your progress each year to ensure you’re on track to reaching your goals. The earlier you start, the more time your money has to grow. Keep in mind that downturns in the economy are only temporary: maintain a long-term perspective, and don’t panic with every little dip.
- Make sure you know where your important documents are in case of an emergency. A safety deposit box is an ideal place for storing documents, collectibles, and heirlooms that are hard to replace. Safety deposit boxes can’t be accessed 24/7, so don’t store anything in there that you might need in an emergency, like your passport or the only copy of your living will, advanced medical directive, or durable power of attorney.
- Improve your credit score. Lenders favor the strongest borrowers during a recession. You can take advantage of better terms and rates if you have a high credit score.
- Make sure you designate a capable person to make financial decisions for you if you are incapable of doing so yourself.
Set Up An Emergency Fund
According to financial planners, an emergency fund should contain three to six months’ worth of living expenses. This is a rough rule of thumb, so consider saving more if you can.
Make sure you only use your emergency fund when you’re faced with a true emergency, like sudden job loss, a natural disaster, or unexpected medical bills.
Free Up Some Cash
You might need to raise some cash as quickly as possible if you do not have an emergency fund or if your emergency fund has already been exhausted. There are several ways you might do this:
- Sell belongings. Make a list of everything you can sell from your home and garage. Hold a yard sale or advertise your goods on online marketplaces such as Facebook, eBay, ThredUp, OfferUp, LetGo.
- Ask for help. Ask a friend or family member for a loan. Just make sure that you follow through on any repayment promises to minimize any potential strain on the relationship.
- Make extra money. Find a side hustle, request that raise, or work extra hours at your current job. With the increase in working from home, many job sites like FlexJobs advertise part-time or remote jobs with flexible hours, while many freelance gigs are available on websites like Upwork, Freelancer, and TaskRabbit.
- Borrow. While this should be a worst-case scenario option, you can take out a loan from your retirement account. 401(k) loans may be available if you pay them back on time. If you have less than $50,000 in your vested balance, you may borrow up to 50% of it.
Keep Track of Your Debts
Emergencies are much more challenging when you are in debt. In some cases, good debt can increase your net worth, such as when you borrow money for college, a home, or a small business. Cars, clothes, and most credit card debt fall into the bad-debt category since they don’t increase in value or generate income. Avoiding bad debt is always a good idea, regardless of whether or not you’re facing an emergency. You can reduce your debt in one of these ways:
- Consolidate high-interest debt with a low-interest loan.
- Settle your debt through debt settlement, in which the lender forgives part of your debt.
- Ask your lender about debt-relief programs.
Carry Insurance
Having insurance is an essential part of emergency preparedness. Ensure you have the right coverage based on your needs and make necessary changes to your insurance policies (such as property, health, life, car, and umbrella). If you become disabled and can no longer work, look into purchasing disability insurance.
Also, consider bundling your car and property insurance for savings on your premiums. If you get your renewal notice in the mail, you should contact your insurance company once a year to ensure you don’t miss any available discounts.
Prioritize Your Health
Believe it or not, your health is a vital part of your financial wellness. Medical expenses can make or break your ability to save money. They can also significantly impact your budget when they arise out of nowhere.
Carrying health insurance is one way to protect your financial well-being. Health insurance can reduce the out-of-pocket costs you face related to healthcare – and they can also shoulder some of the financial burden in the case of health emergencies.
Create a Will
Everyone should have a will and a medical (and financial) power of attorney, regardless of age. Wills and trusts are an important part of estate planning. Your estate – which includes everything you own – is where creditors will go to settle debts after you pass. Your estate also represents what will be left to your heirs after creditors are paid.
Most people want a say in how their estate is distributed, and a will or a trust is a great way to outline these wishes. While a will documents how property and valuables are to be distributed, a trust can be used to transfer ownership at any time – and to help manage large sums of money.
It’s challenging to deal with any emergency, even when prepared for it; but emergencies become even harder to handle if you haven’t planned. Preparing for emergencies – whether natural disasters, illnesses, or recessions – can reduce stress, lessen the disruption to your life, and help you be more mentally and practically ready to handle any crisis that may come.
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The AssessmentOption Team