If an emergency or life-altering event happened in the next month, could your finances take the hit? Here’s why you may want to prepare for emergencies and how you can gain some financial peace of mind for whatever the future might bring.
Why should you prepare for the worst?
No one wants to think they’ll lose their job or get in a horrible car accident, but if 2020 was any indication, life is unpredictable and financial challenges can come up without warning.
Even a seemingly minor financial setback can have major consequences, if you don’t have the right funds to meet the costs.
Let’s say you get in a car crash, you have a $500 deductible, and you have no emergency savings. How do you pay for repairs? If you’re stuck, you’re not alone. Many Americans struggle to pay even a $400 emergency.
Many people in this kind of situation might dip into their retirement savings (if they have any and it’s accessible) and end up depriving themselves of income they’ll need in the future. Or, they might rely on credit cards and find themselves deep in debt when the monthly bill arrives because they now have to pay the expenses plus interest. Considering an average credit card rate of 16%, that interest rate makes a $500 emergency expense closer to $600.
Bottom line: if you don’t plan ahead for the real possibility of a financial emergency, your response to unforeseen expenses could trigger more financial problems later on in life.
Financial struggles can even trigger health problems. Finances are the number one stressor in America, according to the American Psychological Association, and their studies show that stress leads to both physical and emotional symptoms like irritability, lack of energy and/or motivation, anxiety, depression, fatigue, and indigestion.
How do you prepare?
First off, improving any area of finance starts with understanding your situation, so the first step is reviewing your income, debt, and living expenses to determine how much you can afford to put toward goals like saving for emergencies.
If you’re already in the middle of a financial setback, an assessment can still be a good first step because it can give you an idea of where you might cut back or reallocate income to meet your needs. For instance, continuing with the example of the auto accident, you might decide to watch movies at home and reallocate the sixty dollars your family usually spends at the theater – putting it toward your auto deductible instead while you try to fix your car.
Second, set a goal and start saving. Now that you’ve taken a serious look at how much money you have coming in and how much you spend, you should have a good idea of how much you can afford to put toward possible financial setbacks.
Not sure about how much to save? Your initial goal could be as low as $1,000, but the ultimate goal is to build up at least three to six months (or more) of your fixed monthly expenses; that way, if an emergency arises – like the loss of a job – you know you have funds to help you meet your daily necessities.
Plan for success!
The more specific you are with your goal and the steps you will take to reach it, the better your chances of success. Also, including steps for celebrating your progress can not only give you incentive to finish but make the process fun!
For example, instead of saying, “I want to save up for emergencies,” actually take the time to write down specifics. Consider something like the following:
Most importantly, consider getting an accountability partner who will help you stay on track and make smart decisions as you try to reach your goal(s). It’s easier to keep going when you have someone cheering you on.
What better accountability partner is there than a Money Coach? Money Coaches have professional financial experience that can help you put your best foot forward, and they can point you to resources for an easier journey, like budget worksheets for assessing your finances and calculators to assess your progress.
Whether you’re going through a difficult financial time right now or you want to prepare for the possibility of a setback in the future, your Money Coach can help you gain some peace of mind and make a plan for greater financial stability. Call 888-724-2326 to get started.
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