How to Prepare Financially for an Emergency
In 2015, 18% of Americans experienced financial hardship and half of them were financially unprepared to deal with that crisis. Those who are unprepared for emergencies are more likely to face high interest debt or end up declaring bankruptcy as the result. Loans and credit cards can help during these situations, but the high interest rates and unmanageable payments can create even worse financial hardship. Whether it’s the loss of a job, unexpected illness, or a major car repair, being financially ready to respond to a crisis will not only alleviate stress, but also prevent you from experiencing worse financial trouble down the road.
So, where do you start when planning for an emergency? Calculating a savings goal can be challenging, since planning for an emergency may seem like an oxymoron. However, there are some general guidelines you can follow to better prepare yourself for a costly crisis.
Most financial experts recommend having 3-6 months worth of expenses saved. To get here, set a short-term goal and a long-term goal. Determine how much money would cover your living expenses for one month. Once you know that amount, figure out how much you would have to set aside each paycheck in order to reach that goal. Before you know it, you will have one month down! Be careful about setting unrealistic goals, especially at first. If your goal is unachievable, you might be inclined to stop saving. In order to continue saving for your emergency fund, create a budget for yourself. When you know where your money is going, you can better find the ‘leaky holes’ in your budget and ‘plug’ them with emergency savings.
One of the best ways to ensure that you are consistently saving is to automate contributions into your savings account. Either have an amount transfer automatically from your checking account to your savings account, or deduct from your paycheck. Additionally, make sure the funds are quickly and easily accessible. Though it is certainly important to look for a savings account with the highest interest rate possible, make sure that you can withdraw at anytime, without fees. A no-penalty CD account also works for emergency funds, and will typically have higher interest rates.
You can also seek out alternative forms of payment that won’t affect your credit or subject you to high interest rates, like Perpay, for major purchases. Whether you unexpectedly need to replace your refrigerator or want to buy that new laptop without tapping into your savings fund, embracing payroll deduction shopping can help you in both emergency and everyday situations.
It’s important to also consider using insurance as an additional safety net. Though it won’t protect against everything, disability, renters, and even life insurance can prevent financial instability often brought about by an emergency. Finally, a strong retirement plan can come in handy when considering future expenses, such as medical bills. If you haven’t started saving for retirement yet, this might be a good time to start. Knowing that you are financially prepared for both the predictable and the unpredictable will not only help you in future times of need, but it will allow you to rest easier every day.