Take These 5 Steps Now to Prepare Yourself for Any Financial Emergency
Emergencies won't wait until you're financially ready, so prepare for them now.
No matter your income or background, you’ll probably experience a few financial emergencies in your lifetime. A tree might fall on your house during a storm. You might lose your job and be out of work for a couple of months. Your kid might break an arm and need to go to the emergency room. There’s no anticipating these things, but that doesn’t mean you can’t plan for them.
You may not know when an emergency will happen or how costly it will be, but developing a general emergency plan can help you better weather these unexpected expenses. Here are five tips to get you started.
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1. Create an emergency fund
The most important thing you can do to prepare yourself for emergencies is to create an emergency fund. This is money you keep in a savings account so it’s readily accessible if you need it to cover emergency expenses like an insurance deductible or a hospital bill. It should contain at least three months of living expenses, although six is even better.
If you don’t already have an emergency fund, start one by allocating a certain amount towards it from each paycheck. Keep saving until you hit your goal. Remember to replenish your emergency fund after you draw upon it and reevaluate how much it should contain at least once a year. A growing family or increasing expenses will require a larger emergency fund.
2. Make sure you have enough insurance
Insurance is rarely cheap, but it can reduce the cost of a $100,000 emergency to only a few hundred dollars. Everyone should have health insurance, and your emergency fund should contain at least enough money to cover your health insurance deductible. You can also save for medical expenses in a health savings account (HSA) if your deductible exceeds $1,350 for a single individual in 2019 or $2,700 for a family.
You must carry some auto insurance liability coverage to legally drive a car, but you should also purchase coverage for repairs to your vehicle following an accident so you don’t have to pay these out of pocket. If you own a home, your mortgage lender will likely require you to have homeowners insurance, and if you rent, you should get renters insurance. Families may also want to consider investing in life insurance in case one spouse dies. This coverage can help your family cover their basic expenses even after you’re gone.
That’s a lot of policies and you’ll probably pay quite a bit in premiums between all of them each year. But when an emergency arises, you’ll be glad you have the coverage. Reevaluate your policy limits once every year or so and shop around periodically to ensure you’re getting the best rate, but don’t let your coverage lapse.
3. Keep some cash at home
It's unlikely that you'll find yourself in a financial emergency that is so immediate you won’t have time to run to the bank, but just in case, it’s smart to keep a few hundred dollars in cash somewhere safe at home. In a natural disaster, services may be down and you might not be able to access the money in your bank for several days or even a few weeks. Having a little cash on hand can help your family cover vital expenses like food or gas until things get back to normal.
It’s up to you to decide how much cash you feel comfortable keeping at home. It’s best to put it in a fireproof and waterproof safe if you have one -- and store it somewhere out of the way where visiting guests won’t see it. Memorize the code and try not to write it down. If you do have to write it down, don’t store the code anywhere near the safe itself.
4. Create an emergency budget
You probably already have a regular budget -- and if you don’t, you should. A budget helps you decide how to spend the money you’ve got coming in each month. But if you lose your job or have huge medical bills to pay, you might have to tighten your belt. This is never easy, but you can make it easier by already having a plan in place.
Make a list of all your monthly bills and prioritize them in terms of importance. Then, figure out which you are willing to go without in an emergency. For example, a gym membership or a subscription to a streaming service isn’t as important as your mortgage payment and your utility bills, so you could eliminate them if need be.
Ideally, you won’t need to fall back on this budget because your emergency fund will cover all your living expenses for a few months, but if you’re out of work for a long time or if you can’t work because you’re seriously injured, you might have to sacrifice some of the less-important items you spend your money on.
5. Pay down your debt
Paying down debt is beneficial for many reasons, one of which is that if you owe less, your debt will cost you less and you'll be more able to handle any financial emergencies. Start with your high-interest debt first, like credit card debt. Make a list of all of your debts, their outstanding balances, and their interest rates. Place them in order with the debt that has the highest interest rate on top. If two debts have the same interest rate, place the one with the lowest balance first. Aim to pay them off in this order if you want to pay the least amount of money overall.
Make sure you still make at least the minimum payment on all of your debts to avoid late fees, and then put any extra cash toward the debt at the top of your list first. For credit card debt, you could also try transferring your balance to a card with a 0% introductory APR or taking out a personal loan to prevent the balance from growing any more. For student debt, choose the repayment plan that offers the highest monthly payment you can comfortably afford. You can always change this if you hit hard times, but this strategy will help you pay off your debt faster and decrease how much you pay overall.
Remember, when it comes to financial emergencies, it’s not if, it’s when. If you don’t already have a financial emergency plan in place, follow the steps above to set one up now.
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