A financial emergency is a major unexpected expense. This could be a major problem with your car that needs to be fixed right away. Or a leaky roof that could cause serious property damage if not patched up immediately. Unless you figure out how to pay for these emergencies, they could lead to serious consequences and even bigger expenses.
While you can’t really prevent financial emergencies, good planning and the proper savings in place can help you deal with them quickly and effectively.
Here’s how to get things set up to cover a financial emergency before it happens.
Build a three-month emergency fund
Keep this in a separate account from your regular savings so that you don’t accidentally spend it. Experts recommend saving at least three months’ worth of expenses saved up, but you could aim for more if your expenses are high.
While building a big fund can take some time, this is the best defence against a financial emergency. You can start building up your emergency fund by sending a small amount from every paycheck into a savings account.
Rethink your expenses
If you haven’t set up a budget yet, spend some time figuring out where your money is going. This could help you find ways to save more by lowering costs or cancelling services and memberships that you’re not really using.
You can also create a fallback budget. This is a bare-bones budget that only includes the most basic expenses. If you’re ever in a financial emergency, this will show you all the things you cannot live without. Naturally, it will also show you where you can reduce spending while you cover the costs of the emergency.
Re-evaluate your insurance coverage
One way to prepare yourself for a financial emergency is to have enough insurance coverage. This way, if something happens, your insurance policy might cover at least some of the cost.
Spend some time looking at your car insurance, what your home insurance covers, and whether things like your bike or other expensive items are insured. Consider looking into life insurance if you have dependants or need extra coverage in case you are in an accident.
Pay off debt to free up funds
During a financial emergency, you might need to cut down your expenses to the bare minimum to cover bigger expenses. But the more debt you have, the more minimum payments you have to make every month.
By paying down your credit card and other debts, you’ll be able to build your emergency fund faster. You’ll also have more money available if something ever comes up unexpectedly.
If you’re feeling overwhelmed by your debt, reach out to an organisation like the Money Advice Service for tips and help.
Look for ways to earn extra cash
Do you have any skills you could monetise? During a financial emergency, you could always make money by freelancing or getting a second job. But you can also earn extra money by babysitting, selling things around the house that you no longer use or walking dogs.
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