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! Keeping your finances organized when you fall upon hard times is one of the keys to surviving and thriving in these situations.
Here are 6 things that you can do now in order to prepare for financial hardship.
How To Set Up A Financial Contingency Plan
Rather than waiting until you fall on hard times, it makes sense to plan for the worst now, while you are in the best position to prepare yourself. Start with these basic points…
Set Up An Emergency Fund
I have talked a number of times on this site about the importance of an emergency fund. Having money set aside will be extremely important if you lose your job, or face some other financial difficulty. My goal (once our debt is paid off) is to to have between 9 months and a year of our living expenses saved for a “rainy day”..
Many people have gone deep into debt (I’m one of them) because they did not have significant savings to carry them through hard times. 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 All Debt
One of the biggest factors in how well you handle a financial emergency is the amount of debt that you have. 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 (that used to be me) to worry about!
Being at the mercy of credit card companies, banks, and other loan servicing agencies, will only add to your stress and may impair your ability to make good decisions during an emergency.
Know Your Options Ahead of Time
Whether it’s an old profession, becoming a part of the contingent workforce, or part-time job, you should ensure that you have a way to earn money that’s not connected to your current full-time job. You may not want to take on that side job, or put more time into your hobby just yet, but knowing what realistic options you’ll have if you are no longer able to work at your current job will be crucial if/when it happens.
Also knowing what expenses you can easily cut and what services you can do without (it may be wise to just cut them now and build up your emergency fund, pay off debt, or save for retirement), can save you from having to make those tough decisions while under stress!
Know Who You Can Depend On
Don’t make assumptions about who will and who won’t help you. Many people who you think you can count on may not be willing or able to help you, while those you’re not even considering could be the ones who offer you the most support during your time of need!
If your relationship allows for it, verify with your loved ones that they would be willing to help out (and find out how) if you fall on hard times.
You may need to consider taking loans from family or living with friends for an extended period of time; it’s best to know ahead of time (if possible), the people upon whom you can rely.
Be Prepared To Sell Your Possessions
I’m not saying that you should start holding garage sales tomorrow, but it is important to have a discussion with your family members and decide what items can go if you fall upon hard times. A good financial contingency plan will take into account how much money can be gained from selling certain items.
It will be much easier to make this plan now, rather than when you are all under the stress of a financial hardship (stress can skew proper judgment)! Decide what things you can part with, and conduct 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.
Be Prepared For Natural Disasters
Even though New Jersey has been hit hard by storms in the last few years, I’m not really focusing on hurricane preparedness, or being able to prevent the damage from a natural disaster in this point. What I am referring to is the ability to quickly get back on your feet after the devastation.
The first thing that you should do is create a home inventory. This will allow you to quickly determine what items were damaged (or are completely missing) after the disaster. It will also help you when filing an insurance claim – everyone around you will be filing claims with their insurance company or requesting disaster assistance from the government. Having a home inventory can help to speed up your claims when that happens.
You should also review your various insurance policies to ensure that you are covered against various disasters. Many people just assume that their policy will reimburse them for all of their damages if something happens, only to find out that they weren’t covered at all, when it’s too late!
Reader Questions
- Do you have a financial contingency plan? If so, what are some of the things that you have included?
- Have you dealt with emergencies in the past? If so, what have you learned from the experience(s)?
- Have you ever been hit by the sudden loss of income or dramatic increase in expenses or debt? If so, how did you handle it?
- What else would you add to this list?
What To Look For When Choosing A Life Insurance Policy
It’s all about have that emergency money that you can access quickly for a real emergency!
If you have 6+ months of expenses saved, you are pretty bullet proof to most types of emergencies that folks will encounter. Also, ensure that you’re properly insured so that the unexpected event doesn’t bankrupt you!
So true. Both of those are part of our financial goals at the moment!
I do worry about this situation. Right now the best thing I believe that I can do for my finances is pay off as much debt as possible. I keep a small emergency fund, but that is it.
That’s where I am right now. Trying to pay off debt and keep a small EF so I don’t have to rely on credit cards in an emergency.
Bad things may happen at any point, so I have a kind of contingency plan in place. Nothing overly complicated, just a list of things that I could stop using/doing in order to reduce the pressure – knowing the priorities is what is needed the most in my opinion.
That is more that what most people have in place, so you are already ahead of the game!
I’m stockpiling cash to pay off my old credit card at the end of the year. Then my medical loan by next year. After that, I’ll continue to pay down my student loans, but instead of throwing every spare dollar at them, I’ll work on building up a nice cash reserve so I won’t have to resort to credit cards and medical loans in the future.
That is such a great plan! Some people tell us to forget about saving since we have debt, but in my experience, we will have to use credit cards to help during an emergency and end up right back in the same place! I’d rather build up a small EF and take a little longer to pay off our debt.
Its inevitable, bad unplanned for things do happen quite regularly in life. The concept of an emergency fund cannot be emphasized enough. Its the single most direct way of dealing with those unplanned for situations without denting our finances significantly. It has saved me countless times especially with job-loss.
Secondly, perhaps to add onto that list, have some form of insurance, it doesn’t have to be expensive, just identify your needs, carry out some research and get a policy or policies that best fit your needs and budget.
I agree completely! With how much has been written about emergency funds, it’s still amazing to see how many people don’t have one (or plans to set one up)! Great point about insurance as well.