Planning ahead for a financial emergency is one of the best things you can do
Have you ever heard the saying "Hope for the best, prepare for the worst"?
Though we do all we can to prevent them, emergencies are inevitable. Unfortunately, they are also often expensive.
One of the best things you can do for your finances—and your state of mind—is to plan ahead for an emergency. Preparation may not stop it from happening, but it will keep you cushioned from some of the worst effects.
So how can you prepare? Follow our tips below!
- Start a rainy day fund
- Budget for routine expenses
- Review your insurance coverage
- Know what you can get rid of in a pinch
Even though this is one of the most common pieces of financial advice out there, many people still don't have enough money saved to pay for a $500 emergency. If you're one of them, start your emergency-proofing preparation by setting up a rainy day fund.
Are you living paycheck to paycheck? Start one anyway, even if it's just a few cents each week. Every single contribution helps.
One commonly-overlooked aspect of this principle is paying attention. There are often clues beforehand that something is about to go wrong. Has your car or an appliance had the same problem over and over lately? Start setting aside your money now.
There are certain expenses that happen on a set schedule: your income taxes are due every April, the oil in your car has to be changed, the kids need school supplies for the new school year…the list goes on.
You need to plan for these routine costs, and the best way to do that is to budget and save for them. Set a small amount aside every time you get paid. You can either do this yourself or you can have it done automatically by asking your employer to split your paycheck and deposit the amounts in different accounts. This option makes it easier on you because you won't have to remember to do it yourself and, when you need the money, you won't have to dip as much into your rainy day fund or—worse—your credit cards.
When was the last time you reviewed your insurance policies? Do you have the right amount for your needs? Do you have more than you need?
Make sure your home is covered. Double check that your health insurance will cover the costs of a hospital visit and that the deductible is affordable. If you have more coverage than you need, consider changing your policy to free up some money for your savings.
Do you know which parts of your budget you can cut back on—or get rid of completely—in an emergency? Which will result in immediate savings when you cut it?
Examining your budget can help you stay on top of your situation in the present as well as the future. If you can figure out which areas you're spending needlessly on now, you can cut them and use the money you save for something else, like building your rainy day fund or paying off a loan.
If you suddenly needed $500, how would your finances be affected? Preparing for an emergency now will make the inevitable just a bump in the road instead of a crippling event.