How to Prepare for a Financial Emergency

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It's always wise to be prepared for the worst - this includes financially. You don't want to have the rug pulled out from under you one day when your budget can't handle an emergency expense. You want to get over the shock of the steep costs, pay them and move forward. You want to treat it like a small bump in the road - not a complete disaster. 

No Emergency Savings

A lot of people are completely unprepared for the worst to happen. According to research in 2019, only 40% of Americans could afford a $1000 emergency expense without taking some drastic measures. That means that more than half of Americans would have to put the costs of this emergency on their credit card, take out a personal loan or borrow money from their friends or family members.

Build Up an Emergency Fund

One of the best financial back-up plans that anyone can make is an emergency fund. An emergency fund is an accessible stash of savings that you can use to cover urgent, unanticipated costs without any consequence. Using your savings is a risk-free payment option. You don't have to think about repayments, interest rates or penalties. The only issue with withdrawing from your fund is that it will take time to build up the balance again. 

How much should you put away in your fund? It depends on what you intend to use it for. Setting aside $1000 could help you deal with emergencies like minor car repairs and plumbing fixes. Putting $20 a week into a savings account will give you this balance in a year. It's that simple. 

You might also be interested in putting together a long-term emergency fund. This style of emergency fund will prepare you for much more than household repairs and car trouble. It's designed to keep you afloat during major upheavals like job loss, illness or a death in the family. You can put as much as you think you'd need into this fund. However, it's a common belief that you should have at least three to six months of your salary put into your savings account. 

A Line of Credit

Saving up six months of your salary is an ambitious goal that you won't achieve in a couple of months. It will take a long time to build. 

While your emergency fund is still growing, you will want to look into another type of financial back-up plan. Otherwise, you're leaving yourself vulnerable to unexpected costs. 

One of the best solutions that you can turn to is a line of credit. A personal line of credit is an open credit borrowing option that you can use whenever you need it. You only pay charges on what you borrow. It's a convenient safety net when you don't have a full emergency fund to rely on. If you're curious about how to get one, take a look at the personal line of credit options available at CreditFresh and see how you can apply online. 

Insurance

Insurance is designed to help you recover from expensive emergencies. Without it, you could easily plunge into financial insecurity. 

It's always important to get insurance for situations that are not out of the ordinary and that you know you could not afford on your own. It would cover situations like damages from a car collision, repairs from a basement flood, or surgeries for your pets. Even with a substantial emergency fund, these can be incredibly challenging for a single person to handle. 

That's why you should try your best to have health insurance, auto insurance and home insurance. If you're a pet owner, consider getting pet insurance to cover veterinary bills and prescription costs. Pet insurance plans are relatively cheap and won't put a dent into your monthly budget. It's a small price to pay for financial security. 

It's true that you may never encounter an expensive problem that requires your insurance, but that's not a gamble that you should be comfortable taking. Insurance can be a really useful back-up plan. 

However, there are some types of insurance that aren't as necessary. For instance, lots of tech companies offer extended warranties for electronics to their customers so that they can save on repairs and replacements for products like smartphones, laptops and televisions. The problem is that the costs of repairs are sometimes cheaper than the protection plans. So, you aren't really protecting yourself from a financial disaster. 

Stick with the original warranty that comes with the initial purchase. Save your money for something else, like your emergency fund. 

If you've learned anything from this year, it's that it's far too easy to get pushed into financial insecurity. COVID-19 proved that your whole life could get turned upside down in a matter of weeks. Being prepared for the worst might feel overzealous at first, but when the time comes, you will be thankful that you gave yourself some safety nets like an emergency fund, a line of credit and an insurance plan to fall back on.