It’s not a pleasant thought, but everyone should prepare for a potential financial emergency. Whether it’s a medical emergency, natural disaster, or job loss, having a plan in place ahead of time ensures that you are prepared to navigate any challenging financial circumstances.
While the idea of how to create a financial emergency plan may seem daunting, the process can be broken down into 8 easy to follow steps. Once the steps are followed, you’ll know exactly how to respond if a financial emergency ever arises.
Step 1: Figure Out Your Financial Standing
The first step in creating a financial emergency plan is to get an accurate understanding of your current financial standing. The best way to start is to compile a budget. Consider all your earnings and expenses, including monthly obligations such as rent, groceries, utilities, gas, insurance, and entertainment.
It is important to be realistic when creating a budget to ensure that you can adhere to it sensibly. Additionally, knowing where your money is coming from is essential to understanding what expenses you can actually afford ahead of time.
Step 2: Build An Emergency Fund
It is important to have enough money saved to cover expenses for at least three months in the case of an emergency. Start by saving a small amount each month, and make sure to store the money in a separate account dedicated to your emergency fund. While you may want to use the money in the emergency fund as soon as it accumulates, it’s important to leave the money in there until an actual emergency arises.
Step 3: Make A List Of Your Essential Bills
When times get tough it is important to know which bills are essential to keep your family afloat and which can be put off until income begins to return. Essentials include medical bills, rent or mortgage, groceries, utility bills, and car payments, as these items are not necessarily things you can do without. These bills should take precedence over other unnecessary expenditures.
Step 4: Remove Unnecessary Spending
In the event of a financial emergency, it is essential to trim down your spending as much as possible in order to make ends meet. This means the cancelation of nonessential items such as streaming services, gym memberships and other luxuries. You can also look for cheaper alternatives, such as making your own meals and trading services with friends and family. Cutting out nonessential expenditures will help you to stay financially afloat.
Step 5: Consider Additional Income Options
When creating a financial emergency plan, it’s important to think of additional ways you can bring income into your household. Consider looking into government relief programs, taking a second job and freelance opportunities. Before moving forward with any of these options, always consider how it will impact your current family income versus how much additional income you will bring in.
Step 6: Reorganize Debts
When dealing with a financial emergency, it’s important to prioritize your debts accordingly. Contact all your creditors and explain the emergency and your inability to make payments in full. Creditors may work with you and modify your current payment schedule accordingly. Additionally, it’s a good idea to tack on additional interest to the unpaid balance so that you do not face financial penalties in the future.
Step 7: Create a Timeline for Future Payments
Once you have adjusted any existing payment schedules, it is important to have a timeline of when the deferral is lifted and when payments will resume in their full amount again. This will help to keep you on track and ensure that you resume payments on time when your financial emergency is over.
Step 8: Re-Assess Your Plan
Once your emergency is over and you have resumed payments on all your bills, it’s important to make sure that you’re still on the right track. Check your budget to make sure you are staying within it and save an additional amount of money each month to keep up your emergency fund. Additionally, if you had to tap into other sources of income, make sure to return those funds once everything is back to normal.
Final Thoughts
Financial emergencies can be incredibly stressful, but having an emergency plan in place beforehand will make navigating it much easier. Creating a financial emergency plan is an 8 step process that can be broken down into manageable chunks. When you have worked through each of the 8 steps, you will be prepared to handle any financial emergency you may face.
