Most of us will face some type of financial emergency at some point in our lives. Because of this fact, it is not our ability to avoid such emergencies that leads to financial success, but it is often our ability to recover from them that matters. Even though we don’t know when, where, or how an emergency will come, there are some practical things that we can do in order to help us withstand them.
Having a financial contingency plan is always important, even more so, now that the economy is more unstable than ever, it is a necessity for every household! Trying to keep your finances organized when trouble strikes is part of the key to surviving and thriving in these situations.
Here are 4 things that you can do now in order to prepare for financial hardship:
Plan What Expenses To Cut
I think this is the first and easiest step in preparing for financial hardship. Before the disaster even comes, you can evaluate your expenses and determine which ones you could easily cut if necessary.
Think about it: Do you really need to have 500 cable channels? A data plan for you, your spouse, and all the kids? A car for every adult in the home? A two-week long vacation every summer; and another one for your anniversary?
I’m sure we can go on and on about what unnecessary expenses you can cut, and everyone’s list would be different; but the main point is that you have to think of these things before the emergency hits. Discuss this with all the members of your household now and see what current expenses you all could do without.
Thinking through these things in advance will be much easier, since financial hardships have a tendency to stir up strong emotions and make it hard to concentrate on the task at hand. Avoid the stress, the arguments, and the finger-pointing by making the tough decisions now, before the emergency strikes!
What Items Can You Sell?
While you’re talking to your family about what expenses you can cut out of your budget during a financial crisis, you should also make a list of the things you can sell. A good financial contingency plan will take into account how much money can be gained from selling certain items.
Again, it will be much easier to make this plan now, rather than when you are all under the stress of a financial hardship! Decide what items you can do without, and do some research to see how much you could possibly get for them. Knowing that you can get $7,000 for you 2nd car may be all that you need to survive a financial emergency.
Even if you don’t have a spare car, you can look for other items that you can sell during tough times. For instance, do you have a fancy lawnmower? Sell the fancy one, and buy a simple, used mower. This may not be ideal, but neither is being in the middle of a financial disaster with a fancy lawnmower, yet not enough money to make another mortgage payment!
If the emergency lasts long enough, or the financial disaster is large enough, consider selling your home and renting. Of course this only works if your house can sell for more than you owe (not the case for many who purchased within the last 5 years)!
Look at everything that you own, and decide what you can sell now. This is another tough decision that should be made before the emergency comes.
Establish An Emergency Fund
This is probably the most common way that we prepare for financial emergencies (it’s actually in the name ;-)). It is easy to set up an automatic transfer or direct deposit to your savings account, and let the fund build up to whatever your goal is.
Having money set aside will be extremely important if you were to lose your job, or face some other financial difficulty. In our case, once we are out of debt, we will aim to have between 9 months and a year of living expenses in a high-yield savings account. But for now, our goal is to be able to cover at least two months.
Many people have gone deep into debt (I’m one of them) because they did not have significant savings to carry them through a difficult time. The purpose of an emergency fund is to remove the stress, fear, and even the need to borrow, when financial hardship comes. Every good financial contingency plan should involve a large emergency fund!
Pay Off Debt
Next to having an emergency fund set up, this is probably the most important step you can take in preparing for a financial emergency.
It is much easier to adjust your living expenses than it is to rearrange your debt payments. So when you are in a position where you need to free up a large amount of committed money, you won’t have over $500 in student loan repayments (I’m telling on myself again) to worry about!
This doesn’t just go for long-term debt like student loans, mortgages, and car notes, but you need to fervently attack any short-term debt – such as pay day loans, personal loans, and even store/shop financing on things such as furniture or car repairs
Being at the mercy of credit card companies, banks, and other loan servicing agencies, will only add to your stress and may cause you to make bad decisions during an emergency.
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