Nobody plans to lose a job or fall ill.
But you can plan for unexpected events so they don’t topple your finances.
4 Ways to Prepare for a Financial Emergency
Here’s what to do to prepare for a financial emergency so a sudden loss in income doesn’t bring you down.
1. Create an Emergency Fund
Read and memorize:
“A proactive move everyone should make to protect themselves from income loss, is [to] start an emergency fund with a goal of having six months of living expenses set aside,” said Ariel Ward, a financial adviser with Abacus Wealth Partners.
Having a savings cushion means you can tap into your reserves when your household income drops rather than racking up debt from charging everyday expenses on your credit card. Some financial experts recommend a minimum of three months of living expenses in your emergency fund. However, the more you have saved, the greater financial security you can enjoy.
A proactive move everyone should make to protect themselves from income loss, is [to] start an emergency fund with a goal of having six months of living expenses set aside.
Get in the habit of setting money aside every time you get paid until you reach your target. In terms of where you should store that money, Michael Gerstman of Gerstman Financial Group recommends you park the cash in a no-risk account, like a savings account or money market account.
It may be tempting to invest those savings for a potentially larger return, but you don’t want to risk losing your savings either. Plus, you’ll want this money to be easily accessible whenever you need it.
2. Live Below Your Means
Get in the habit of spending less than you make, and an income loss won’t be as devastating as if you needed every last cent of that paycheck to survive.
“Don’t live beyond your means, so if you should find yourself in the position of dealing with a major financial crisis, you won’t need to significantly reduce your lifestyle,” Gerstman said.
Living frugally also allows you to build up that emergency fund we just discussed.
If you can swing it, Ward suggests dual-income couples should live off just one income and save the rest. Not only does this rapidly increase savings, but it takes the pain away from a potential income loss in the future.
Not sure how to fit saving into your budget? Try the pay yourself first method.
3. Get Covered By Insurance
Because you never know what life will throw at you, it’s important to make sure you have adequate insurance coverage.
“Everyone should have disability insurance for income replacement, and couples who are dependent on one another’s income should have a term life insurance policy with each other named as the insured,” Ward said.
You may not need life insurance if you’re single, but if you have dependents or have outstanding debt a family member co-signed for, you should get coverage.
Disability insurance, however, is important for everyone. You might get it through your employer, but if not, you should look into purchasing a low-price plan. It can mean the difference between security and ruin — for you as an individual or for your loved ones — if you are no longer able to work.
Having good health insurance is also vital to maintain financial security, said Liz Frazier, a New York-based financial planner and author of the upcoming book “Beyond Piggy Banks and Lemonade Stands.”
“Nothing can take a family down financially like major medical bills,” she said.
4. Share Vital Financial Info With Those Who Need to Know
If you’re married or in a committed relationship with shared finances, make sure both partners are involved in the money-making decisions and details. A serious illness, injury, separation or death can really shake things up if the healthy or remaining spouse hasn’t participated in the money management.
“Understand what [money] you have, where it is, what your bills cost and what you owe,” Frazier said. “Too often the husband is the one managing the finances, and the wife isn’t involved. If the husband dies or [they] divorce, this leaves the wife extremely vulnerable.”
Get in the practice of budgeting together as a couple. Have money talks with your partner about short- and long-term goals. Determine how you’ll split shared expenses.
This doesn’t mean you need to share everything and shouldn’t maintain separate bank accounts. In fact, having some money in your own account can be helpful in the event of an unexpected separation or one that’s not amicable. Still, one partner shouldn’t be totally left in the dark regarding shared finances.
If you’re single, you may want to let someone you trust know how to access your important financial information in the event of an incapacitating illness or injury. That way if you’re in the hospital for a couple weeks, you don’t have to come home to an eviction notice on your door.
Nicole Dow is a senior writer at Codetic.