Having some savings to lean on in times of duress is an integral part of creating your own safety net. While preparing for an emergency isn’t as fun or glamorous as preparing for a vacation or new home, it is a vital aspect of financial responsibility which ensures that unforeseen circumstances don’t derail the work you’ve done to build the life you’re currently living. Emergencies happen in an instant, and lack of preparation can cause disastrous financial effects that can last for years, slowly degrading the overall strength of your savings.
A financial expert recommends these top 10 tips you need to consider when saving for an emergency. In addition, you will get clued into the one thing to never do when planning for an emergency. These tips will help guide you toward preparing for possible crisis, and their implementation will safeguard a post-crisis future.
1. Give yourself a preparation assessment
In order to define what steps you need to take to prepare for financial emergency, you first have to take a no-holds-barred inventory of your present state. Doing so will help you draft a personalized preparation outline. There are a variety of questions you can ask yourself, including:
How long could I get by if I lost my job tomorrow?
What would my financial life look like if I needed significant surgery and recovery time?
What are my total assets?
An honest self-examination isn’t always easy but it is crucial to see where you’re really at in your level of preparedness.
2. Draft an emergency plan
Thankfully, financially preparing for an emergency isn’t a new concept. There are many resources you can use to help you build a framework that works for you. A good starting point is this emergency plan outline.
Insurance shouldn’t be your only option. In the event of a natural disaster or large-scale emergency, insurance agencies are overwhelmed with claims and it can take months to even get started on your own claim, at which point you may have drained your resources significantly. Start an emergency fund at your bank. Begin with whatever amount is possible for you. Make a deposit plan and stick to it.
4. Buy a comprehensive home-owner’s insurance package
It seems obvious, but home-owner’s insurance is often considered a grudge purchase. The reality is that there are many options for homeowner’s insurance that account for emergencies of all kinds – natural disasters, floods, fires, earthquakes, tornadoes. Know your area’s natural dangers (tornadoes in the Midwest, earthquakes on the West coast, etc.), and design your insurance accordingly.
5. Know your options
In the event of a medical emergency, bills can pile up fast, leaving your financial life in ruins. It is possible in certain circumstances, however, to withdraw money from your IRA without penalty. There’s a lot of paperwork involved, but hardship and disability are eligible. Do some research into what your options may be.
6. Remember, cash is king
When disasters or emergencies occur, it’s tempting to begin charging things to credit cards or taking out outrageous loans to cover the costs. Resist this temptation. Excessive borrowing in times of crisis can exacerbate your state of emergency. Now that you have emergency savings, use it. Pay for what you can while you can, and you’ll be surprised how far it will go. Don’t go for the quick fix that will only make things worse.
7. Invest in preventative measures
As the old saying goes, “an ounce of prevention is worth a pound of cure”. If you know certain risks about where you live, your line of work, or your family’s health history, use that information to your advantage. If you live in an area prone to earthquakes, reinforcing your home could save you thousands of dollars should an earthquake occur.
8. Have a backup plan for your backup plan
Contingency plans are crucial in the event of emergencies, which cause events and circumstances to change quickly. Draft plans, backup plans, and backup-backup plans, and you’ll sleep easier at night knowing you aren’t banking on a single solution needing to work.
9. Commit to disciplined sacrifice
If you want to have a certain amount of money put away for emergencies and your current job or career isn’t making that possible, it may be time to take on a second job in the short-term so you can secure your long-term future. Working a little extra will grow your savings quickly, and later down the road, should an emergency occur, you won’t be scrambling.
10. Fire-proof your important documents
In the event that a fire engulfs your home, will you know where your important documents are? A fire-proof safe will ensure that in any event your documents will emerge unscathed. A large fire will be disaster enough without having to reproduce all your important paperwork, so fire-proof your documents as soon as possible.
The one thing to never do when preparing for an emergency
The one thing to never do when financially preparing for emergency — stashing cash! Avoid keeping a “stash” of cash in your closet, mattress or glass jar at home. Although you are taking a step forward in saving for an emergency, that money is not gaining any interest, plus it is at the mercy of floods, fires even robbery. If you do want to hold on to some extra cash just in case, keep it locked in a fire-proof safe.
Recent research shows that one-third of Americans are one paycheck away from homelessness. If an emergency were to occur, the results in these circumstances would be truly disastrous. Ensure your future today by planning ahead for the unthinkable. You’ll thank yourself later.