Life is full of twists and turns. While some unexpected events can be pleasant or even joyous, others can cause immediate and intense stress. Many unexpected situations related to your home, health, family, transportation, or other important areas of life often come with the additional blow of extra expenses. The best time to prepare for these types of situations is well before they happen. You may not know exactly what to expect, but you can take a few steps today to cover your bases.
Establish an Emergency Fund
Regardless of your financial situation, an emergency fund is a necessity. This is money that is earmarked specifically for unexpected situations. For example, it may pay for unexpected medical expenses if you need to make a visit to the emergency room, or it may pay your car insurance deductible after an auto accident. As a rule of thumb, save enough to cover all of your home and auto insurance deductibles. You can then make smaller contributions regularly to build this balance up.
Contribute to Savings Regularly
In many cases, your emergency fund will pay for all of your unexpected expenses, but you still need to have a second account for personal savings. An emergency fund is not intended to cover dips in your income level, so what happens if you lose your job or have to take an extended amount of time off work for an illness or other personal reasons? If you are not already making regular contributions to your savings account, consider getting in this habit today. Each person has a different threshold for comfort regarding their target balance. Some people are comfortable with a balance that covers three months of expenses, and others want their savings account balance to be equivalent to their income for a full year. Both the emergency fund and the savings account are cash accounts. These funds are separate from your retirement accounts and taxable investment accounts.
Pay Down Credit Card Debt
Credit cards have high interest rates, and their revolving term makes it relatively difficult to pay off a large balance. With this in mind, your credit cards should not generally be used as your primary plan to cover unexpected expenses. However, it may be reasonable to use them as a secondary plan once your emergency fund and savings account balances are tapped. In order to maximize the benefit that credit cards could provide in a serious situation, focus on paying down existing credit card balances today. In addition, if you do need to make charges to your credit card, focus on reducing the balance as soon as possible. This will keep interest charges as low as possible and will help you to be better prepared for the next emergency situation that arises.
Know Where to Turn for Additional Funds
Using your personal cash reserves should always be your first line of defense when you are confronted with unexpected expenses. Your emergency fund and savings account help you to avoid taking on debt. However, there are instances when applying for an installment loan or a line of credit loan could be beneficial. For example, if your house has been severely damaged by a storm, you may find yourself struggling with on-hand funds to cover the repairs needed to keep your family safe. In situations like these, a loan or a line of credit can help you cover the unexpected expenses today and pay the loan balance off in installments. If you borrow money, only borrow the amount of money that you actually need. In addition, adjust your budget so that you can pay off the loan as soon as possible. Take time learning about the different financing options available so that you can apply quickly if the need arises.
You may not know what life has in store for you, but you can make plans today so that you are prepared for life’s curveballs or roadblocks. Each of these tips provide incredible benefits that prepare you for the unexpected in different ways. Focus your attention on each of them so that you are as prepared as possible.