How to Be Prepared for Financial Emergencies

While no one wants to think of what would happen if you ran out of money or faced hard times, it’s important to take into consideration what you would do when you’re strapped for cash. There are a variety of things that could have that can affect your financial situation: job loss, injury or illness, or even a natural disaster.

The best way to be prepared for the worst is to have a back fund that will be able to cover your most essential expenses or any large bills that might pop up that you can’t cover with your monthly income.

For many people living paycheck to paycheck, an emergency fund isn’t even something they’ve thought of. Besides dealing with monthly bills, many people have to put money towards savings (for things such as retirement, a vacation, their child’s education, or a new home). You might even be dealing with debt. It can seem impossible to put away more money towards an emergency fund but there are tips and tricks you can utilize to protect yourself and your family if you suddenly fall into a financial disaster.

1. Think Through How You’d Cut Expenses

For those who don’t have an emergency fund completely setup, you can save money and redistribute it by cutting the cost of certain expenses to avoid filing for bankruptcy. The best time to figure out which expenses you would cut during a financial crisis is ahead of time. Whether that means buying a discount mattress (like a bed in a box Nectar mattress), beard trimmer, tuition service, or anything else in your life, it’s important to swap the expensive habits and items you have for less expensive ones, at least until the financial emergency is able to be swept under the rug.

If you try to do this process after you’ve lost your job, you won’t be able to think clearly. Doing it beforehand allows you to review what items you spend an unnecessary amount on. This could be in the form of overpriced lattes or luxury soaps. You can do small things like bringing in a homemade lunch to work instead of buying one.

There are a few more ways to cut expenses:

  • Cancel any subscription you haven’t had a use for, including things a Netflix account, gym membership, or even hosting. Make sure the services you cancel don’t have any large cancellation fees.  
  • If you can find law firms that work for free at first and only require you to pay after you win, you can save on upfront costs. Examples of such providers include the MN offices law firm.
  • Get rid of plans, like dental or insurance plans, that are expensive and look for alternatives like free dental implants.

2. Ensure That You Have Available Credit

Credit can seem scary, especially to those who already have debt. While you should be wary about contributing more to that debt, having a good amount of credit ready for an emergency can help you get down that rough road if you don’t have quite enough saved up. Remember, you don’t have to use your credit card until you absolutely need to. When looking for a credit card keep these things in mind:

  • Interest rates for credit cards can be very high. To avoid accumulating interest, find a card that has the lowest percentage rate annually or choose one that has the most advantages for you.
  • When using one, be sure to start paying off your credit card debt as soon as you can.

3. Understand Risks That Come With Relying On Retirement Accounts

You may have separate saving accounts set aside for your future. It’s important that those accounts are dedicated for exactly that purpose. It may seem tempting to tap into your 401(k) or other retirement funds, but you throw your retirement plans off track for something that is only temporary.

Before you consider taking money out of your retirement fund, consider the pros and cons.

  • If you choose to take money from your 401(k), you’re going to owe interest when paying it back.
  • Choosing to withdraw from your 401(k) or IRA before the age of 59½ means that you’ll get an additional tax of 10% on your regular income tax.   

4. Help Protect Yourself With Insurance

Insurance can help ensure that you and your family are covered when the unexpected happens. When choosing an insurance plan, you want to make sure you’re getting an adequate policy that covers everything you need. Type of insurance you may want include:

  • Disability insurance — Insurance that covers part of your income when an injury or illness befalls you. It typically replaces 60% of your income which can help stop expenses from wrecking your finances.
  • Home insurance — In case there is ever a fire, natural disaster, or theft that damages your property, home insurance is there to cover it. Homeowners are typically required to have home insurance, and it’s becoming a more common thing for renters. It ensures that your belongings will be compensated for if damaged or stolen.
  • Life insurance — If something unexpected were to happen to you, you want to ensure those you left behind are taken care of and don’t fall into a financial crisis. The best way to prepare for the unexpected is to get life insurance. When getting life insurance, it’s important to remember that it’s typically equal to seven to ten years of income.
  • Health insurance —  Health insurance is good to have to cover any expenses related to illness or injury. You can look to get it individually or see if your workplace offers it.

Having a contingency plan in place is the best way to deal with financial hardship. Stick to your plan and you’ll be back on your feet in no time.