How to Prepare for a Financial Emergency or Crisis?

source: deluca-associates

Everyone does extensive planning for pivotal expenses of life such as, purchasing a home or a vehicle, providing the best possible education to children, etc. However, most people do not save and plan for financial emergencies that may occur throughout life. Loss of employment, medical conditions, and natural disasters are all unforeseeable emergencies that threaten people’s lives and their financial equilibrium.

Therefore, it is vital that everyone understands how to prepare for a financial emergency.

1. Prepare an Emergency Corpus

The first and foremost step in preparing for financial emergencies is to build a robust emergency corpus by putting aside cash reserves and creating a savings account for emergencies. Ideally, an emergency corpus should be large enough to suffice a family for at least 6 - 9 months, depending on the individual’s economic commitments and ongoing work security.

These savings should not be touched unless there is an economic emergency. Individuals can have some leeway by putting aside 3 months' worth of capital for minor emergencies, and use the remaining corpus for significant emergencies.

2. Check for Sufficient Insurance Coverage

During emergencies, costs can add up quickly, and thus, having adequate coverage prevents crises from piling on top of one another. This is applicable to all existing policies and to policies one may have to purchase. People should perform due diligence research and find trustworthy insurance providers and options to safeguard their family’s future:

• Home-Owner Insurance: Provides coverage against loss and damage from theft or fire
• Disability Insurance: Guards against unemployment periods due to severe illness or injury
• Collision Insurance: Covers vehicles against costly repairs and transportation loss
• Umbrella Insurance: Offers protection when other insurance policies fall short
• Long-Term Insurance: Safeguards spouse and children against institutional and residential costs

Individuals who have relying dependants must consider purchasing such insurance policies.

3. Consider Tax Exemptions on Products and Assets

Being prepared includes considering all available options that may aid in reducing monthly expenditures and using them appropriately to maximise profit as well as mitigate loss. College savings schemes and tax-exempted retirement accounts are some examples of such products and assets:

• Organisations that match portions of one’s retirement plan also offer tax rebates.
• Many college savings programs have tax benefits on contributions made towards children’s future education.
• Donations and charity also help in lowering tax burdens.

Lowering the amount of tax an individual has to annually pay can be an excellent approach to lower overall expenses and thus, be prepared for financial crises.

4. Ensure Budget Planning and Routine Maintenance

Without planning a budget, consumers have no clue about their capital income and outgo. A budget is a valuable tool that assists consumers in efficiently and optimally allocating their funds where needed. However, everyone needs monthly budgeting, irrespective of financial emergencies. Here are a few tips to maintain a budget and expenses:

• Keep expenses within budgetary limits.
• Do not squander every tax exemption you get.
• Refrain from spending monthly savings on frivolous items.
• Lower credit card balances and dues.
• Increase equity of real estate as quickly as feasible.

Individuals should conduct routine maintenance of their houses, vehicles, and health to detect issues early and save on expenses later. One must not avoid issues that clearly need tending to, as this can lead to far greater hazards.

5. Maintain a Good Credit History and Score

All individuals should perform their due diligent research and only borrow from reputable lending institutions. It is also advisable to have an agreement in place that makes borrowing during economic emergencies easier.

Individuals must also maintain a strong, healthy credit history and score in order to acquire loans during financial crises with ease and under favourable terms and conditions.

6. Maximise Liquid (Cash) Assets

Individuals without sufficient liquidity should refrain from investing in high-risk investments such as stocks and shares. The required cash quantum depends on one's risk tolerance and financial obligations. Here are some financial instruments that help individuals during economic crises:

• Savings accounts
• Checking accounts
• Certificates of deposit (CDs)
• Money market accounts

Apart from CDs, there are no tax penalties or foreclosure charges on the above-mentioned financial instruments, unlike retirement accounts. Additionally, valuations of these resources do not fluctuate with market conditions, unlike:

• Exchange-Traded Funds (ETFs)
• Index funds
• Shares and stocks

This means that consumers can withdraw capital at their own leisure without having to incur economic losses.

7. Manage and Minimise Monthly Bills

Being organised can aid many individuals in saving more money on their monthly expenses. Here are a few things one can do to achieve the same:

• Develop simple strategies to minimise expenditures.
• Review monthly budgets to identify areas incurring more than needed expenses.
• Consider opting for lower-cost emergency-only plans.
• Search for insurance policies with lower premiums.
• Reduce electricity bills by switching off appliances and gadgets when not in use.
• Set reminders for debts and repayments each month to avoid defaulting.
• Schedule postal cheques and electronic payments so they arrive prior to due dates.
• Make a list to monitor all accounts and identify what can be merged or shut down.

Reducing recurring monthly expenditures means less hassle while paying bills during emergencies.

8. Handling Credit Card Deals and Debts

People with credit card debts are likely paying them off at high-interest rates that eat up significant chunks of their monthly budgets. Individuals who have ongoing debts should do the following:

• Pay down credit card debts in a timely fashion.
• Transfer the balance to a low-interest rate card to save some of their monthly budgets.
• Aim to save more than what balance transfer charges are.
• Reduce and control their monthly economic obligations.
• Ask their present credit card issuer if they will lower interest rates.

Lending organisations often lower their monthly interest fees to retain existing consumers instead of searching for new ones.

9. Identify Possibilities of Earning More Revenue

Examples of possible job opportunities for everyone to make some additional money:

• Sell belongings that are no longer in use
• Work as a freelancer
• Be a part-time babysitter
• Pursue bank account and credit card bonuses
• Get another job

Revenue generated from such side hustles may appear modest in comparison to one’s primary income, but it does help improve economic stability over time.

10. Open Community Bank or Credit Union Checking Accounts

Due to their nature, these organisations and institutions are more inclined to regard an individual as an actual person than just as a credit score. Therefore, such communities and unions have a higher probability rate of providing capital to aid individuals in need during emergencies.

With the knowledge of how to prepare for a financial emergency, individuals additionally must always keep economic data structured and accessible. Assessing and analysing future predicaments like employment loss or natural calamities takes a lot of time. Life can be quite uncertain, so ensure that all family members and valuable belongings are insured and be prepared and cautious for the worst.