What to do during a financial emergency and how to prepare
From the COVID-19 pandemic to several natural disasters, many Americans have dealt with some type of financial emergency—from unemployment to medical bills—in 2020.
According to the Federal Emergency Management Agency (FEMA), 6-in-10 American households experience at least one financial emergency in a given year. Approximately one-third of American families have no savings, and nearly 50% of Americans would struggle to come up with $400 in an emergency situation.
But there are ways to prepare for a potential financial emergency, so you’re not completely depleted if one hits.
How to prepare for a financial emergency
Having a plan for a financial emergency is like having insurance—you don’t want it until you need it. But by then it’s too late, so to protect yourself, you have to plan ahead.Create or revise your budget
If you don’t already have a budget, a good place to start in preparing for a financial emergency is to create one. If you already have a budget in place, you’re halfway there.
One of the most common methods of budgeting is the 50/30/20 rule, which says you should set aside 50% of your income for essentials, 30% for things you want, and 20% for savings or paying down debt.
Start an emergency fund
Most experts recommend setting aside three to six months’ worth of expenses. This way, if you lose your job or have an unexpected expense pop up, you’ll still be able to afford your essential needs until you can get back on your feet.
If putting that much into an emergency fund seems daunting or unattainable, start smaller, even if it’s $5 or $10 here and there.
Pay down your debt
If your debt is hanging over your head when a financial emergency strikes, you’re likely going to feel even more stressed. The first step to paying down your debt is picking a debt repayment strategy. Once you have a plan in place for how you’ll tackle your debt, you’re more likely to stay on track.If you’re having trouble managing your debt, you may want to consider debt consolidation. But your eligibility for opportunities can depend on your credit score. Consolidating debt with bad credit can be a bit of a challenge as it’s tougher to qualify for balance transfer credit cards, but there are alternatives like debt management plans.
What to do during a financial emergency
Now that you’ve done your doomsday prep, you’re ready to take on a financial emergency head-on.Don’t rush a major financial decision
It can be challenging to think rationally in the face of an emergency. That’s why it’s key to plan for an unfortunate event ahead of time. Try to evaluate your situation with a clear mind before making any decisions. If possible, consider consulting an expert, such as a financial advisor.
Contact your creditors and lenders
Many creditors and lenders have COVID-19 relief programs in place, but even if you’re not facing financial hardship because of the pandemic, you can learn about ways to avoid late payments or interest charges, possibly defer payments, or set up an alternative payment plan by reaching out to your creditor or lender.
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