You never know when a financial emergency will strike. Life is full of unexpected happenings, and your budget needs to be ready for it. This often means planning ahead of time so that you are ready for what’s next. Because there is no magic solution to your finances, it is vital that you plan right now for things you can’t truly plan for.
Right now is a great time to conduct a financial fire drill. Look at your situation and determine whether or not you are ready for a financial emergency.
Changes to Your Financial Situation
Look at your finances, and imagine a change to your financial situation. Just as you would imagine the possible problems that come with a fire in your home — and how you would escape — you need to think about what you would do in the even of a financial emergency. Here are some scenarios to consider:
- Drop from a two income household to a one income household
- Complete loss of employment for your family
- Natural disaster that adds to expenses
- Medical catastrophe that results in high bills
- Death of a family member, particularly a significant other
It’s not pleasant to consider these scenarios. However, in order to create a financial fallback plan you really do need to think about the possibilities. Each of these situations comes with its own challenges and requirements. However, there some questions that you can ask yourself as you prepare your financial fallback plan:
How big is your emergency fund? Look at your emergency fund. Does it have at least six months’ worth of expenses in it? How long would your emergency fund last if you had to draw on it for half your expenses? All of your expenses? Some situations can be alleviated. For instance, if you are laid off unemployment benefits can help you reduce your dependence on your emergency fund. Health insurance payouts can help you in the event of a medical emergency, and adequate life insurance can protect your family should one of the breadwinners die. Making sure you have adequate coverage for health and life can be a big help to your financial fallback plan.
What expenses can you cut from your budget? In order to ensure that your emergency stretches as far as possible, it’s a good idea to know which expenses you can cut from your budget. Go through your expenses now, and identify which items can be cut in an emergency. Subscriptions, entertainment spending, and other superfluous costs abound in most budgets, whether it’s lunch at a restaurant every day, or an expensive cable package. Knowing which expenses you will cut first ahead of time makes it easier to make those decisions later. Additionally, you will be able to see exactly what some expenditures are really costing you right now.
How diverse is your income? Another way increase your preparedness for a financial emergency is to consider cultivating additional sources of income. If you have other sources of income, so that you aren’t so dependent on the cash flow from one job, it can help you prepare for a financial emergency. You’ll still have income, even if something happens to your primary source, and in the meantime your extra income sources can help you build up your emergency fund a little bit faster.
The bottom line is that you need to think about the unpleasant possibilities. Think about the possibilities, and how you would hold up situations of financial difficulty. Make a plan to prepare for the unexpected, and you’ll be more likely to weather the financial storms life sends your way.
Photo credit: Robbie Howell