A financial emergency (or an emergency of any kind) is one of those situations that we pray doesn’t happen but we would be remiss not to prepare for it. In all of our lifetimes we are likely to encounter a number of economic downturns, recessions and emergencies. It is essential that we are financially prepared for such occurrences.
While many are in the midst of a financial crisis right now (I have written an article on What To Do When a Financial Emergency Hits – read it here), today I want to talk about how to plan financially for an emergency. I want to talk about it now while it’s still raw and fresh in everyone’s minds. It’s too easy to think during the good times that a disaster ‘will never happen’ or to say ‘I’ll deal with that if it happens’. The truth is, it will happen. We will all face another emergency situation. The best thing you can do for yourself and your family is to be prepared. Financial preparation and emergency preparedness is something we should all take seriously.
So how do you prepare?
Step 1: Build an Emergency fund. In short, an emergency fund is a liquid, cash fund in an easy to access bank account to be used in the event of an emergency. I have written in detail about Emergency Funds here. Consider under what circumstances you would dip in to your emergency fund and how long it would last you.
Step 2: Keep a small supply of essential goods at home. I am not promoting hoarding or stock piling goods but in the event of an emergency do you have enough to get you through? Things like essential medication or formula if you have babies?
Step 3: Ensure you and your family are adequately insured (note, I said adequately insured, not over-insured). Insurance is preparing for the worst case scenario and making sure your financial interests are protected. Everyone’s insurance needs will differ depending on life circumstances. You should review your coverage and make sure you have adequate protection for yourself and your family. What financial shocks could you survive based on your current insurance cover? Consider your level of cover, your policy excess and any special terms of your policy. Different types of insurance include: mortgage protection, life assurance, income protection, health insurance, car insurance, home insurance, travel insurance, pet insurance and gadget insurance.
Step 4: There are a number of ways to prepare your income for a crisis. Firstly, diversify your income sources. If you are dependent on one person for your entire income, you leave yourself in a very vulnerable position. Secondly, know your employers policy around sick leave etc. And lastly, know what financial government assistance might be available to you if you find yourself needing to use it.
Step 5: The last and one of the most important things is to have a plan. Consider different scenarios and decide on what your plan of action would be and how that would impact your monthly budget. Look at the worst case scenario and know the minimum amount you need to survive each month. What could you easily cut out of your budget? How much does it cost you each month for housing, food, light & heat, essential transport and healthcare?
While I know that we can all recover from a financial emergency, it can be a long road. I would urge you to take steps to prepare yourself as much as is possible and practical.