June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
Have you ever known anyone who found themselves suddenly unemployed? Or someone who had to leave their job due to an illness or death in the family? Or someone who was injured in an accident and couldn't work for a time?
Most of us hope something like that will not happen to us. But what if it does? Would you be prepared?
Whether it's a mild crisis like temporary unemployment or a catastrophic one like a severe illness, you will bounce back quicker if you take precautionary steps beforehand and make good decisions during your crisis.
Financial Emergency Insurance
What is financial emergency insurance? It's not a specific insurance policy sold by an insurance company. It's merely preparing for a financial crisis before it occurs. Here's how you create your own "insurance":
- Build an emergency fund. This fund ideally should equal 3-6 months of living expenses. It may take time to build your fund to that level and you may not think you have the extra monthly income to do it. Just get started. Big savings accounts are built up with a bunch of small contributions.
- Stay on a budget. If you know where your money is going you'll have a better chance of "finding" money to contribute to your emergency fund. Most people can build an emergency fund within a couple of years by simply cutting back on "impulse" buys and items like coffee, cocktails, and dining out. Others choose to make small changes that actually improve their quality of life--like carpooling to work with a friend or working from home (lowers gas and day care expenses).
- Pay down your credit card debt. You'll be better prepared for an emergency if you are debt free. To pay off your credit card debt, start with the card that has the highest interest rate. As each one is paid off, attack the next one--all the way down the line. Think twice about using that credit card for non-essential expenses (meals at a restaurant, electronic gadgets, movies and music).
- Review your insurance policies. Some employers offer short-term and long-term disability coverage to their employees as part of their overall benefits package. If your employer doesn't offer this benefit, consider buying it yourself. Disability insurance is designed to replace 45%-60% of your income if you become injured or too sick to work. Also, review your homeowner's/renter's insurance, auto, and health insurance. If you have family that depends on you for your income, make sure you have adequate life insurance coverage. For more information on how much life insurance is adequate, check out the website of the Insurance Information Institute), or try this insurance needs calculator at LifeHappens.org - Insurance Needs Calculator. Many financial crises can be managed if you are properly covered in these areas.
When Emergencies Happen
If you are the victim of a crisis like those mentioned in the first paragraph, don't wait passively and hope the tough times will pass. Start by taking inventory of your situation.
- Prepare a new budget. What sources of income do you have now? Unemployment compensation? A disability policy? Emergency savings? Help from family? Add it all up and compare it with your total monthly expenses.
- Itemize your needs - the essential expenses. These are the most important for daily living - housing expense, utilities, food, medical care, etc.
- Make hard decisions. If your expenses exceed your income, you're going to need to cut out non-essential items like dining out, going to the movies, or buying the latest magazines off the rack. And it may be time to take a break from cable or satellite TV.
- Contact your creditors. If you are proactive in contacting the people you owe money to (credit card issuers, mortgage holder, etc.), they can be very accommodating. They may be willing to reduce your minimum payment or defer a payment for a month or two.
- Consider professional help. Depending on the severity of your financial problem, you may want to seek help from a credit counseling service. If you choose to utilize a credit counseling service, do your homework to make sure it is a reputable agency. For information on credit counseling services in your area, visit the National Foundation of Credit Counseling website.
Hang in There
We can never know for sure if and when we will be faced with a financial crisis, but we CAN control how we prepare for one. Should a financial crisis occur, hang in there. By taking the right steps and making good decisions now, you will be able to handle whatever comes your way.