Ten ways to prepare for a personal financial crisis
The prospect of a significant adverse event affecting your finances, such as a job loss, illness, a car accident, or a pandemic, can keep anyone awake at night.
Maximize your liquid savings
In a crisis, cash accounts such as checking, savings, and money market accounts, as well as certificates of deposit (CDs) and short-term government investments, will be of the most assistance. It would help if you started with these resources because their value does not fluctuate with market conditions, instead of stocks, index funds, exchange-traded funds (ETFs), and other financial instruments in which you may have invested.
It means that you can withdraw your funds at any time without incurring a financial loss. In addition, unlike retirement accounts, you will not face early withdrawal penalties or incur tax penalties when withdrawing your money, except for CDs, which typically require you to forfeit some of the interest you’ve earned if you close them early. Invest in stocks or other higher-risk investments only after you have several months’ worth of cash in liquid accounts.
If you have a significant obligation, such as a mortgage or ongoing tuition payments for a child, you may want to save up more months’ worth of expenses than if you’re single and renting an apartment. A three-month expense cushion is considered the bare minimum. Still, some people prefer to keep six months or even two years’ worth of expenses in liquid savings to protect against a long period of unemployment.
Make a budget
If you don’t know how much money comes in and goes out each month, you won’t know how much you need for an emergency fund. And if you don’t keep a budget, you have no idea whether you’re living within your means or overextending yourself. A budget is not a parent; it can not force you to change your behavior; however, it is a valuable tool that can assist you in determining whether you are satisfied with where your money is going.
Prepare to minimize your monthly bills
You may not have to do it right away, but be prepared to start cutting out anything that isn’t necessary. If you can reduce your recurring monthly expenses as much as possible, you’ll have less trouble paying your bills when money is tight.
Begin by reviewing your budget to determine where you may be spending more money than necessary. Do you, for example, pay a monthly fee for your checking account? Investigate how to switch to a bank that provides free checking. Learn how to cancel it or change to a lower-cost emergency-only plan. You may discover ways to cut your costs right away to save money.
Perhaps you have a habit of leaving the heater or air conditioner on when you’re not home or of going lights on in rooms you don’t use. You might be able to reduce your utility bills. It may also be an excellent time to shop around for lower insurance rates and see if you can cancel certain types of insurance, such as car insurance, in the event of an emergency. Some insurance companies may grant you an extension, so research the procedures and be prepared.
Closely manage your bills
There’s no reason to waste money on late fees or finance charges, but it’s something that families do all the time. It would help if you were incredibly diligent during a job loss crisis in this area. Being organized can help you save a lot of money on your monthly bills. Over a year, one late credit card payment could cost you $300. It may even result in the cancellation of your card at a time when you require it as a last resort.
Set aside time twice a month to review your accounts to don’t miss any deadlines. Schedule electronic payments or mail checks to arrive several days before the payment is due. This way, even if there is a delay, your payment will most likely arrive on time. Start a list if you’re having trouble keeping track of all your accounts. When your list is complete, you can use it to ensure that you are on top of your accounts and see if any can be combined or closed.
Take stock of your Non-Cash assets
Being prepared may entail considering all of your options. Do you have frequent flier miles that you could use if you need to travel? Do you have any extra food in your house that you can use to plan meals around to reduce your grocery bill? Do you have any gift cards that you can use for entertainment or sell for money? Do you have credit card rewards that you can convert to gift cards? All of these assets can help you reduce your monthly expenses, but only if you know what you have and how to use it. Knowing what you have can also help you avoid purchasing things you don’t need.
Pay down your credit card debt
The interest charges you pay each month most likely consume a sizable portion of your monthly budget if you have credit card debt. If you make it a point to pay off your credit card debt, you will lower your monthly financial obligations and put yourself in a better position to start saving. You can set your money toward more important things by eliminating interest payments.
Get a better credit card deal
If you currently have a balance, it may be beneficial to transfer that balance to a card with a lower interest rate. Paying less interest allows you to pay off your total debt more quickly and gain some breathing room in your monthly budget. Just make sure that the savings from the lower interest rate outweigh the balance transfer fee. If you’re transferring your balance to a new card with a low introductory annual percentage rate (APR), try to pay off your balance before your rate increases.
Look for ways to earn extra cash
Everyone can earn extra money by selling items they no longer use (online or at a garage sale), babysitting, chasing credit card and bank account opening bonuses, freelancing, or getting a second job. The money you earn from these activities may appear insignificant compared to what you earn from your main job, but even small amounts can add to something significant over time. Furthermore, many of these activities have additional advantages: You might end up with a less cluttered home or realize that you enjoy your side job enough to make it your full-time job.
Check your insurance coverage
We suggested that you shop around for lower insurance rates in step three. If you have too much insurance or could get the same coverage for a lower price from another provider, these are apparent changes you can make to lower your monthly bills.
On the other hand, having excellent insurance coverage can prevent one crisis from piling on top of another. It’s also essential to ensure that you have the range you require, rather than just the bare minimum. It applies to both existing policies and policies you may need to purchase.
Keep up with routine maintenance
If you keep the components of your car, home, and physical health in good working order, you can detect problems early and avoid costly repairs and medical bills later. It’s less expensive to fill a cavity than to get a root canal, less costly to replace a couple of pieces of wood than to have your house tented for termites, and better to eat healthily and exercise than to end up needing expensive diabetes or heart disease treatments. You may believe you don’t have the time or money to deal with these issues regularly, but ignoring them can lead to much more significant disruptions in your time and finances.
To sum up
Life is unpredictably unpredictable, but if there’s one thing you can do to avoid disaster, it’s to be prepared and cautious. You can turn a potential financial disaster into a minor setback with proper planning.
