You never see a financial emergency coming, and the big ones can make a big dent in your savings. Since emergencies come without warning, here are some tried and tested tips that have helped other Americans successfully navigate financial emergencies.
As is the nature of emergencies, you can never predict when they will occur, but that does not mean you cannot prepare for them. Some say the only things certain in life are death and taxes; you budget around taxes, you might as well for other eventualities.
Part of preparedness involves getting your papers ready. As highlighted by the Emergency Financial First Aid Kit (EFFAK), the government recommends you gather and store personal, household, medical, and other financial information within easy reach.
They further recommend that you store paper copies in fireproof and waterproof safes and keep copies in cloud storage or secure offsite storage facilities. These documents can come in handy in securing emergency borrowing in case you need it.
The government advocates keeping some small amounts of liquid cash with you at all times because ATM’s might fail during emergencies, leaving you exposed and unable to cater for minor expenses such as gas money to rush a loved one to hospital.
Getting the right insurance cover can be a matter of life and death. Homeowners or even people living in rental property could do with property insurance for that rainy day.
Health and life insurance should be on the essentials list of most people, covering everyone in the family, including kids. For car owners, it is important to have valid auto insurance cover to cater for liability arising from property damage or bodily injuries.
It is vital that the insurance cover is adequate to cater to most emergencies. Most people will skimp on comprehensive life insurance payments in favor of low premium policies.
They figure that since they are young and healthy, their current position does not warrant paying the hefty premiums. However, the affordable insurance covers often are high deductible policies, exposing them to debt in case a serious emergency crops up and racks up bills quickly.
As for property owners, they should know that homeowners insurance does not typically cover flooding. One great way other homeowners have managed to solve this is purchasing a separate insurance for that.
A good rule of thumb that has worked for previous life insurance policyholders is ensuring the policy’s death benefits are large enough to cover their children’s education. That will give anyone peace of mind especially if the family relies solely on their income.
3. Emergency fund
Just because something unexpected happens, it does not mean it should always take you by surprise. Setting up an emergency fund has helped most people cope with emergencies. That means saving liquid cash to sort unforeseen occurrences such as sudden house repairs caused by floods or hefty medical bills in case of an accident.
Ideally, experts recommend saving at least three to six months’ worth of your usual living expenses. If you can afford it, you could even do a year’s worth. This rainy day fund can help mitigate the effects of losing your job, sickness that causes gaps in your earnings, or other unforeseen situations.
It can be a difficult undertaking but with careful planning, most people have been able to hit their savings target.
Not all debt is bad, but debts can act like a double-edged sword whenever you run into financial emergencies. Debts drain away funds whenever you need them the most and shrink your access to emergency financial assistance.
Minimizing debt can help reduce the financial burden of a person who has run into a financial sinkhole since all resources go to solving the emergency rather than seeing a chunk of it siphoned by debt repayments.
One of the requirements of borrowing is a good credit score. If you are drowning in debt, that can hurt your chance of securing reasonable credit whenever a financial emergency strikes. Circumstance may force you to acquire credit with unfair rates, piling on your debt.
Reducing debt payments opens up resources for increased savings or investments, further securing your financial future and helping solve a financial emergency quicker.
There are some investment options that allow for quick access to your investments in case of an emergency. Although it can have a steep learning curve, some investors have found joy in investing in shares.
If you decide to go the stock market route, you could trade in individual stocks, index funds, or seek the help of robo-advisors. And it’s not that difficult as there are apps that can make the entire process easier, such as TD Ameritrade, Robinhood, and Stash. Webull takes the crown for best Robinhood alternative as it offers $0 commissions and account minimums as well.
Since the average American received $2,990 from the IRS in tax refunds for the year 2020, most experts advocate channeling such unforeseen windfalls towards investing.
It usually takes three days to liquidate shares from the day you sell the stock and the amount deposited to your brokerage account.
A household budget gives you a chance to systematically list expenses against your revenue. With such a list, you can single out every detailed expense for debate on its usefulness.
One way people have better prepared for emergencies is smoking out the unnecessary expenses and replacing them with shrewd ones, such as reducing entertainment expenditure and diverting those funds into emergency savings.
Further, budgeting helps keep your finger on the pulse of your financial emergency set-up. Armed with this knowledge, someone can ascertain if certain funds are under or over funded, so they know how to strike a healthy balance between the funds.
To sum up, while financial emergencies often catch people unawares, there is no reason why you cannot prepare for them. By saving for emergencies, investing adequately, and getting adequate insurance, most people have turned most financial emergencies into minor bumps in the road to financial peace of mind.