Do you know what you would do if you were suddenly hit with a large, unexpected expense? Many people don’t have a plan in place at all, and because of this, things like big medical bills, unexpected car repairs, and lost wages completely derail their finances. While you can’t predict when or where emergency situations will happen, you can prepare yourself so you’re able to maintain your current lifestyle and pay unplanned expenses without batting an eye.
Start By Creating an Emergency Fund
Ideally, you don’t want to have to worry about finding ways to fund emergency situations. When you have an emergency fund set up, you won’t have to borrow money from friends and family for that new hot water tank or other emergencies. You can handle things on your own.
A good rule of thumb to follow is to have an emergency fund that’s relatively liquid and covers between three and six months of your living expenses. If you are single or you are a one-income family, you should consider saving enough money to cover a year’s worth of expenses.
If you’re in debt and living paycheck to paycheck, that might not be feasible right away. In this situation, Dave Ramsey suggests creating a starter emergency fund that holds $1,000. Then, after you pay off your debt, you can work on increasing the balance in your emergency fund.
Purchase Insurance Coverage
When you don’t have a lot of excess cash to cover financial setbacks, insurance is extremely important. At the very least, make sure you have homeowner’s or renter’s insurance, and auto insurance.
Health insurance is another must to adequately protect yourself and your finances. You might also want to consider adding disability insurance to the mix. Of course, even with good insurance, medical bills can still add up when you consider deductibles, co-pays and items that aren’t covered. If you find yourself in debt due to health issues, or need surgery or some other treatment, check out companies that offer loans for a medical procedure.
If you’re a business owner, you should also make sure you have adequate business insurance, including a good liability plan. You should also look into purchasing a business interruption insurance plan to cover your business expenses in the event a catastrophic event brings your business to a halt.
Lastly, you should purchase life insurance. You should have enough life insurance to pay off all of your debt, cover your funeral expenses, and cover living expenses for your family to live on if you pass away. If you have children, your life insurance policy should also be large enough to cover at least some of their education costs.
Create a Backup Budget
Chances are, you have a monthly budget in place for your family currently — and if you don’t, you should. What most people don’t think about though, is creating a backup budget.
Your backup budget should show where you can cut back on your expenses if you had to live on unemployment or disability — or if you have a sudden rise in expenses due to an unforeseen circumstance. Remember, when a crisis happens, you might not be thinking clearly. If you have a backup plan in place, it’s a lot easier to implement it when needed.
Also, don’t forget to talk about your finances and budget with your family regularly. Talking about your finances with your family keeps everyone on the same page and no one has to worry about what will happen if disaster strikes.
Reduce Your Debt and Increase Your Available Credit
It’s easier to manage your finances during hard times if you don’t have a lot of debt. But you should start working to pay off your debt as soon as possible because it frees up money in your monthly budget to add to your emergency savings fund.
As you pay off your debt, don’t close your credit card accounts or any other revolving lines of credit you have. Leaving these accounts open, leaves you with enough available credit to cover emergency expenses.
No one wants to think about what would happen if disaster strikes, but it’s extremely important. The more you plan for unforeseen problems, the easier it is to navigate through issues when they occur.
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