Unexpected events such as getting injured in an accident, losing a job, or experiencing a close family death can affect a person financially. While nobody wants to think about being in such awful situations, planning for these possibilities could help protect one’s finances.
It’s impossible to plan for every type of emergency. Even the most careful planner can be taken by surprise with several events that they didn’t prepare. The good news is, you can do something to lessen the impact of such emergencies and make them more manageable when they come your way.
We’ve put together some practical tips to help you prepare your finances for unexpected events.
Identify Potential Emergencies
Potential emergencies can cost you a lot of money and take a toll on your finances if you’re not adequately prepared for them. So, the first step in planning is to identify those unexpected events that can happen at any given time.
Here are some events that can affect your financial stability:
- Unemployment: Losing your job can be a serious blow, especially when bills start to pile up.
- Home Repairs: Remodeling is essential to maintain your home’s value. But some repairs may come unexpectedly and often require immediate cash to be remedied.
- Sudden Medical Bill: Being hospitalized due to illness or accident can cost you a lot of money. It can even hinder you from going to work, which can affect your main stream of income.
- Death: Finances are the last thing you want to think about when you lose a loved one. But sooner or later, you’ll have to resolve several financial issues, such as resolving the estate and ensuring the living are cared for financially.
Build An Emergency Fund
Once you’ve recognized those potential emergencies, you can better prepare your financial resources and handle them with greater confidence. An emergency fund is a source of funds that you can dip into when you suddenly lose your primary source of income. Ideally, your emergency fund should cover three to six months of everyday living expenses.
Start building an emergency fund if you don’t have one yet. It will help you stay financially afloat if an unexpected event occurs. Just remember to replenish the fund after the emergency subsides.
Track Your Expenses
Planning your expenses is also crucial to be financially prepared at all times. When an unexpected event comes, it’s easier to make adjustments if you know how much and where your money is going. You can begin by listing your daily or monthly expenses and categorize them as needs, wants, and savings.
A well-planned budget would consist of a good balance of your expenses, such as the following:
- 50% for needs: Groceries, rent, housing costs, gas, loan payments, and other essentials
- 30% for wants: Nonessential expenses like monthly subscriptions, clothing, entertainment
- 20% for savings: Emergency fund, savings account, retirement fund
Maintain Good Credit
Maintaining good credit is another helpful tip you can do to prepare your finances for unexpected events. It means making payments on time, whether they are for credit card bills or loan payments. It’s also an indicator that you’re responsible for handling credit and managing your finances well.
Having a good credit score of 670 to 739 is beneficial, especially if you need to take out a loan to cover the cost of unexpected events. Although building an emergency fund is a reliable source, it wouldn’t hurt to have financing options in place, such as CreditNinja.
Get Coverage or Protection
Another way to prepare financially for unexpected circumstances is to get adequate insurance. With reliable insurance coverage, you can prevent one crisis from piling up on top of another since many of the uninvited medical or home-related costs may be covered wholly or partly. In addition, it’s an excellent financial cushion when you find yourself strapped for cash.
Find Extra Income Streams
Besides cutting back on expenses, growing your income can also help you deal with unexpected events. With more money coming in, you’ll be able to save for emergencies.
You can grow your income by selling possessions you no longer use, getting a part-time job, or starting a side hustle. Keep in mind that any small amount of income can add up to something big over time.
Create An Emergency Budget
It’s also crucial to have an emergency budget in place. Remember that your regular budget may not work anymore when an unexpected event strikes. So, in creating one, make sure to leave out the nonessentials and focus more on your needs. Doing so will help you cover the cost of some financial emergencies.
Be Financially Ready For Future Uncertainties
Uncertainties can happen at any time. While you can’t control them, you can take steps now to prepare and protect your finances for the future. But to make it possible, it’s essential to evaluate your current finances so you can take the right course of action. Keep in mind that financial planning looks different for everyone. When preparing for your finances, you also have to consider your priorities, values, and goals.