But when you’re unprepared for a financial emergency the impact it makes on your life – and your mindset – is much greater.
September is National Preparedness Month, so what better time to discuss ways to minimize the impact of financial emergencies in our own households.
Keep in mind that the best time to deal with a financial emergency is when you’re NOT facing one. When you’re in a good mental and emotional state you’ll make better choices and you’ll have more time to do what’s needed to prepare for a financial crisis.
1. Create – or revise – your budget
No discussion about money is complete without discussing the managing of it. Your budget – or if you prefer, spending plan – is the roadmap for your personal financial life. Without it, you’ll end up lost, confused and unsure how to prepare for a financial emergency let alone survive one.
If you haven’t a clue where your money goes, or if you find yourself reaching for the credit card because you have “too much month at the end of the money” a budget is like a spotlight for your spending.
In short, a budget lets you know where you’re going off the rails and gives you a guideline for getting back on track. It can be as basic or as detailed as you like, so don’t let perfectionism get in the way…just do it.
2. Cut spending/Increase income
Once you’ve got an idea where your money is going it’s time to see where you can cut back. Just how much you’ll need to cut back will depend on factors such as income, debt, and the timeframe you set to reach your goals.
Depending on your particular situation this could mean something as simple as spending less on frivolous items. But unless you’re significantly cutting your spending it will be hard to see any real progress if all you’re doing is drinking one less latte a week.
Of course, the other side of the coin is to bring more money into the household.
There are several ways to increase your income.
For example, aside from getting a side gig – which a lot of people do – you can simply adjust your withholding to get more money each paycheck.
You can also strengthen your professional skills to increase your market “worth”. This will give you the ability to get a higher paying job that requires more skills than you currently have.
You may or may not want to move jobs right now, but adding to your skill-set will also increase your confidence. It can be used to leverage a pay raise at your current job and/or it’s also something to fall back on if you decide to work for yourself after a layoff.
3. Eliminate (or drastically reduce) your debt
Our population as a whole – like our government – is buried in debt. For many people, debt repayments comprise a huge portion of their monthly spending.
Reduce or eliminate your debts and you instantly increase the money you have available for other things. It can be hard to get out of debt, but it’s safe to say that nobody ever wished they’d kept the debt they paid off…nobody.
4. Think creatively
Create a “what if” scenario in your mind. Make a checklist of exactly what you need to do in the event you experience a financial crisis of some kind.
For example, think about what bills absolutely must be paid, which ones can be put off for a bit, and which ones should you get rid of completely (e.g. the cable bill).
This will help you avoid much of the anxiety that surrounds the unknown by giving you concrete, well thought out plans for moving forward.
5. Start a “rainy day” fund
When creating your budget, include a specific amount of money to be paid into your emergency fund. To make it easier, have your employer contribute the money to a specific account (preferably a high yield savings account) so that you never see the money.
If you’re self-employed or your employer doesn’t offer the option to split your paycheck, you’ll need to be more disciplined about putting money into your emergency fund; find an accountability partner, a calendar reminder or other tool to help you stay on track.
Once you’ve got a predetermined amount in your account (typically 6 months to a year’s worth of living expenses) you can loosen up the reins a bit. Remember, however, to replace any money you use in an emergency situation to keep your account well funded.
Finally, it helps to remember that a financial emergency won’t last forever. If you’ve set aside the funds and have a plan in place you can significantly reduce any emotional and mental impact by taking the need for money out of the equation.