There’s never a convenient time for an emergency, but there are things you can do now to prepare for any financial emergency you might face down the road. Let’s break down what you can do to prepare for a financial emergency before it strikes. We’ll also look at the steps you should take when you do find yourself dealing with a financial emergency.
Best Tips to Prepare for a Financial Emergency
You never know when a financial emergency might happen to you, so it’s a good idea to start preparing for one right now. Here are some tips to get you ready now for whatever the future holds:
- Build an Emergency Fund: There’s arguably no better way to prepare for a financial emergency than to have an emergency fund ready to go. If you don’t have one yet, start today. Make room in your budget to put a little money in your emergency fund each month and don’t use it for anything other than a serious emergency!
- Maximize Your Savings: Make sure that you’re earning as much interest as you can on your savings account so that you can have even more money set aside for a rainy day. Consider moving your primary savings account to a high-yield account. It’s okay to shop around for savings accounts and find one that will benefit you the most.
- Start and Maintain Healthy Financial Habits: Building healthy financial habits, like sticking to a budget and paying your bills on time, can set you up for success before an emergency strikes. If budgeting and making on-time payments are already second nature to you, you’ll have an easier time managing your money and getting back on track after you’re faced with a financial emergency.
- Give Your Documents a Home: Keep all of your financial, medical and personal documents somewhere safe, secure and easy to locate. If all of these documents are in different places or you can’t remember where they are, you’ll be even more stressed when dealing with a crisis. Make it easier on yourself by knowing exactly where everything is now.
Assess Your Financial Situation
Before a financial emergency strikes, have an honest and complete review of your financial situation. Take a look at areas for improvement in your finances. A financial emergency is much easier to handle if you are already aware of your current financial situation and working on areas of improvement. Ask yourself the following questions:
- Where is my credit right now? (Hint: if you don’t know, check your credit score and go to annualcreditreport.com to get your free credit report from each of the credit bureaus).
- What is my debt-to-income ratio?
- Am I spending less than I earn each month?
- Do I regularly follow a budget?
- Am I aware of all the monthly subscriptions and bills I pay?
Evaluate Your Expenses
- Review Your Spending: Review all of your bank, debit and credit card accounts and make a list of every expense you’ve had that month. You can categorize items like groceries, utilities, childcare, entertainment, etc. This will help you see where your money is going each month. Also make a note of whether you’re spending more than you’re making each month.
- Identify Needs vs. Wants: You may know the definitions of what needs and wants are, but have you taken an honest look at where you’re spending your money? Now that you’ve reviewed your spending, identify which of those expenses are needs and which are wants.
- Cut Down on Your Wants: If you’re spending more than you’re earning, it’s time to cut down on some of the unnecessary purchases you’re making. Since you’ve already identified what your needs and wants are, decide which wants you can live without each month. It can be painful, but it will be worth it in the long run!
Look into Insurance for Financial Emergencies
Insurance is a great way to prepare for financial emergencies before they happen. It can help you get back on your feet afterwards. If you’re not sure which insurance is right for you, here’s an overview to help you get started.
- Health Insurance: Medical emergencies can cost a pretty penny. The best way to afford any medical costs is to have health insurance. If you don’t get insurance through your employer, research the other options available to you through government assistance.
- Car Insurance: Car accidents happen. And it can be expensive to make the necessary repairs to your car after an accident. If you have a car, you need car insurance. Do your research to find a car insurance plan that works for you.
- Homeowner’s Insurance: If you own a home, you’ll want to have insurance for any emergency – natural or human-caused – that can cause damage to your home. Homeowner’s insurance and the coverage you need can vary depending on where you live, so do you research to find a plan that will be best for you.
- Renter’s Insurance: If you rent a home or apartment, you’ll still want to be covered in case damage happens to your home. Renter’s insurance can vary depending on what kind of home or apartment you’re renting, so learn what will be best for you.
- Disability Insurance: This insurance can help you provide for yourself and your family members if you become unable to work because of a disability. If you are the primary income provider in your home or you have family members depending on your income, this may be right for you.
What to Do When Financial Emergency Strikes
There’s never a convenient time for an emergency, but the way you react to an emergency can help you manage your money, reduce stress, and get back on your financial feet quicker.
Work with Your Lenders
After an emergency, you may be short on cash, but keeping your payments current can help you avoid further financial trouble. Make a phone call to your lenders to see if you can work out a payment plan that’s in the best interest of both parties.
Add to Your Income
Whether you draw on emergency reserves, ask a loved one for help, take advantage of government programs, look for additional employment, or all of the above, search for ways to supplement your income to get you through your financial hardship.
Keep Track of Your Credit
Financial emergencies have a tendency of taking a toll on your credit. Check your credit report and monitor changes to make sure that your credit isn’t moving in the wrong direction. Do everything you can to make your payments on time and pay down your balances as you’re able to.
Summary and Key Takeaways
The best thing you can do to prepare for a financial emergency is to start reviewing your finances and taking the necessary steps today. This includes:
- Building an Emergency Fund
- Reviewing Your Financial Situation
- Practicing Healthy Financial Habits
- Getting the Right Insurance for You
If you start preparing for a financial emergency today, you’ll thank yourself when the time comes. You’ll feel less financial stress and strain when you do everything in your power to keep your finances healthy and ready for whatever lies in store in the future.