It happens. At some point during our adult life, most of us are faced with some type of financial emergency. It could be something as minor as losing a billfold with $20 inside it, to something far more serious, such as racking up thousands of dollars in medical bills. Preparing for a financial emergency now can help minimize the impact both financially and emotionally should you experience one later.
What can you do to best prepare for a financial emergency?
How do you best prepare so if you are faced with a financial emergency, you have a plan in place to survive it? It takes time and discipline.
Build an Emergency Fund
Do you have an emergency fund that could cover three to six months of living expenses? If not, you’re not alone. According to a 2019 Federal Reserve survey1, 41% of American adults say they couldn’t come up with $400 to cover an unexpected expense or could only do so by borrowing or selling something. That’s a problem.
- The first step you may wish to take is to calculate how much money it takes to run your household each month – this would include rent or mortgage, loan payments, utilities, insurance, food, transportation and minimum monthly payments on any credit cards. Again, an emergency fund should cover three to six months of household expenses.
- If your current emergency fund falls short of this amount, you may want to look at your budget. While it may be uncomfortable, cutting expenses such as entertainment, premium television, vacations or subscriptions, even temporarily, and putting this money toward your emergency savings account may help you if faced with a financial emergency in the future.
- If you are working toward reducing your current debt but do not have an adequate emergency savings, you may also consider paying just the minimum on this debt and reallocate the excess toward your emergency savings. While paying down existing debt is a smart strategy, not having funds to cover an unexpected expense may put you further into debt.
- It is also important to remember to rebuild your emergency fund if you have to use it to pay for a financial emergency.
Taking the time to build up an emergency fund will allow you to navigate through financial emergencies.
What can you do to handle a financial emergency?
If faced with a financial emergency, you may have options!
Negotiating with Creditors
When you have a financial emergency, you may wish to reach out to creditors to determine if payment arrangements can be made. In a February 2021 article How to Negotiate with Creditors by Lauren Ward on crediful.com2, she offers these key tips, among others:
- Be honest and direct – Explain your situation and why you’ve fallen behind. Use facts! It will not benefit you to lie or embellish. And, state that you want to fulfill your obligation and come to an agreement.
- Stay calm and professional – If you find yourself losing control of your emotions, quickly and politely end the conversation and call back at another time.
- Have a plan – Prior to the call, review your budget and understand what payment amount you can afford. Don’t put yourself in a situation or position of not being able to fulfill this new obligation.
- Get it in writing – Once an agreement is made, be sure to get the new payment terms including payment amount, length of time, interest rate and fees in writing.
What are some common financial emergencies?
Whether you own a home or rent an apartment, there may be things that happen that would result in a financial emergency.
- A natural disaster such as a flood, tornado, hurricane or fire may turn into a financial emergency, especially if the proper insurance is not in place to cover any losses.
- Other expenses, such as appliances breaking down and needing to be replaced or regular home maintenance expenses, may present a financial hardship if funds are not set aside to cover such an expense.
Health and medical expenses, often unforeseen, may result in a financial emergency.
- Since March of 2020, we’ve all seen the impact that COVID-19 has had on family, friends, neighbors, co-workers and even ourselves.
- Aside from a global pandemic, injuries and illnesses, even with adequate health insurance, can pose financial hardships, because often deductibles need to be paid, which are out-of-pocket expenses as defined in the insurance policy.
Job loss commonly results in a financial emergency.
- A sudden loss of income can make it extremely hard to pay your rent, mortgage, car payment, utilities, or for groceries and more.
- Even if you have money in savings, do you have enough to cover your monthly expenses until you can re-establish employment?
Marriage, Divorce and Children
Marriage, divorce and having a baby all present unique financial considerations, which if not planned for, may result in a financial emergency.
- There are fees and expenses associated with both marriage and divorce.
- According to theknot.com, the average cost of a wedding was over $34,000 in 20203.
- Divorce comes with an average price tag of nearly $10,8004.
- Expecting a child can also create a financial emergency, if not properly planned. Experts at SmartAsset.com5 recommend having $20,000 set aside for having a baby.
Death of a Spouse or Family Member
While not something you may think about often, the death of a spouse or a family member may result in unexpected expenses.
- Basic funeral costs range from $6,500 — $10,000, but they can be significantly more based on a variety of factors. Like in Hawaii, where the average funeral expense is roughly $42,0006.
- There may also be additional costs associated with settling an estate or selling property.
While financial emergencies may be a part of life, preparing for them the best you are able and having a plan to handle them when they occur, helps you stay the course in meeting your long-term financial goals.
For more information and to talk to a OneAmerica financial professional who can help you better prepare for a financial emergency and develop a strategy for long-term financial stability, schedule your appointment today!
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