It’s impossible to prepare for everything that could go wrong in the future. However, even if you can’t predict exactly the crisis, you can take steps now to protect your finances in a variety of emergency scenarios by making a personal financial crisis plan.
Types of Emergencies
Unfortunately, it’s not hard for most families to think of an emergency that has impacted them or their loved ones. Here are some types of life events that can affect financial well-being.
- Medical — It might be a sudden slip or accident. Another driver could run a red light. You could get a stomach bug while traveling. Or you could experience the onset of a chronic illness. Believe it or not, most people file for disability because of digestive, muscular and skeletal issues, such as carpal tunnel syndrome. So even if you are careful, a medical emergency still can affect you.
- Caregiving — Women are especially likely to take time off from work to care for elderly and disabled family members or children. This results in a loss of income and a loss of long-term wealth from retirement accounts and other work-related benefits.
- Financial — You could lose your job or you could lose money in a bad investment. Sometimes a single parking ticket can trigger a series of losses.
- Natural disasters — Even if you don’t live somewhere regularly hit with tornadoes or hurricanes, you might experience damage due to flooding, fire, extreme temperatures or high winds.
- Service disruptions — Anything from technical malfunctions to terrorism could mean no water, phone, internet or electricity for extended periods. How long could you and your family last with no services?
The Cost of Emergencies
Emergencies come with big price tags for things like car repairs, medical bills and home maintenance costs, but the real financial damage is long term. For one thing, a household without an emergency fund is more likely to take on debt. The more debt a family has, the less money is available to grow in retirement funds, to pay for children’s education, or to buy a home. The lack of capital to fund these big dreams can lead to a cycle of generational poverty, where no one seems able to get ahead.
Despite the difficulty of saving, it is crucial to have a safety net. Studies show that having at least $500 in savings greatly increases financial stability. (Use this calculator to see how much you might need in emergency funds.)
Make an Emergency Action Plan
The point isn’t to live in fear. You could drive yourself nuts trying to prepare for every possible crisis, but here are five things you can do to kickstart your emergency plan for a variety of circumstances.
- Start saving. It doesn’t matter how small the amounts — just save as much as you can, as often as you can. You never know when you’re going to need it.
- Start investing in your 401(k). Workplace retirement plans offer many benefits, including matching contributions. Always contribute at least up to the matching amount and consider increasing contributions to see bigger returns.
- Get some supplies. The general guideline is to have enough nonperishable food, water (one gallon per day per person), medicine and other supplies in your home to last from three days to three weeks in case of an emergency.
- Re-think insurance. Adequate insurance can be a lifesaver when something goes wrong. Home, car and health insurance help protect your possessions, but what about insurance for your income? Disability insurance helps to cover lost wages during long illnesses and other events — including pregnancy. Self-employed people are especially vulnerable to lost wages when they can’t work because they don’t have paid sick days. Disability insurance can fill some of the gap.
- Make an estate plan. It doesn’t matter if you own nothing other than your body — you still need a plan for your affairs in case you suddenly die or become incapacitated. An estate plan includes a living will, which declares whether or not you want to be kept alive on life support, as well as a letter of instructions, which includes information about what to do with your financial and social media accounts.
Ready to take your emergency planning to the next level? Try SAM’s free Emergency Fund course to create a personalized financial emergency plan.
[Any reference to a specific company, commercial product, process or service does not constitute or imply an endorsement or recommendation by the National Endowment for Financial Education.]
Ver este artículo en espanol: Las situaciones de emergencia no se pueden evitar