Preparing yourself for financial emergencies

Do we know when we will face a financial emergency? The answer is probably no. If we were good with our predictions, we would be predicting how to make more money rather than thinking about how to plan for unexpected financial crisis. The fact is a financial crisis does not have to warn anyone that it’s coming; it comes by a surprise and perhaps also is unavoidable. Loss of a job can mean no more income (and less money in your wallet or bank account) to pay your bills. A serious illness or an accident can leave one with huge medical bills.

The threat of a financial emergency is real if this is not convincing think about the cases where else we protect ourselves:

  • The company you work for has plans to protect itself against unexpected financial situations.
  • We make plans for insuring our properties against unanticipated events such as fire, theft, flood, and other disasters.
  • We buy medical insurance to protect our health and wellness.

So planning for unexpected financial threats should be considered to lesson its impact and expedite recovery when/if it happens. With this post, I wanted to share with you some techniques you can use to prepare yourself against a financial shock

If time is on your side, use it to your advantage. Find ways to save and increase your income as indicated below.

Set up a savings account for emergencies

The first place to start perhaps is with thinking about an emergency bank account. Whether or not you are starting fresh, I suggest that you set up a new savings account that keeps your emergency cash. The idea is to make this account separate from your other bank accounts such savings, checking, or money market. For your emergency cash account, use a bank that you use less often, if possible. Also, think about the bank fees. You don’t want emergency cash account that will eat up your interest or savings in bank fees. You want the money to stay safe, grow and discourages you its use for non-emergencies. Consider to choose access to your money from the account to be immediate or easy when there is an emergency.

If you have options to have multiple direct deposits from your employer, start building your emergency account from there. Request your employer to add some money to your emergency account, in addition to your regular checking or savings account deposits. With the money going directly into your emergency account, you less likely to spend it as you won’t see it in your checking or savings account! If you don’t have a direct deposit but do have online banking option, choose to manually or regularly add (or transfer) to your emergency account. Some online banking accounts give you option of automatically adding money to your checking or savings account on your selected time on regular basis. Use this automatic option to add money to your emergency account from checking or savings account. Regardless of how you arrange to set up your new emergency cash account, remember these points in mind:

  • You want to let the money grow
  • You add money to the account on regular basis
  • You use it in true emergency only
  • You add money to the account before or immediately after you receive new money (a pay check, tax refund, any bonuses, etc.). Don’t wait until the end of month or week to save, as there may not any money left for you to save!
  • You choose a savings plan that is comfortable and realistic to your finical financial. For example, don’t plan to save 10% of your income if you know you only have 5% left of your income after all expenditures. Attempting this may discourage you from saving. Try to start your stockpile of savings with a regular amount that is painless as possible.
  • Savings ton of money does not happen overnight. Be patient and realistic about your savings efforts.

Balance spending and earning

How can you find money to save? There is not any magic to having money left over after all expenses in a given period of time. What we want is to live within our means so we spend less than what we make or earn. This approach will ensure you will end up with savings. On the other hand, we don’t want a situation that requires more spending than earning as this will be sign of debt. Whether you feel you have excess case of savings or debt, it would not hurt to:

  • increase savings and earnings
  • reduce expenses

You can find tips how on to accomplish both of these in this blog. The idea here is to find ways to save as much as possible to contribute to your emergency cash account.

Posted on 6/26/2007
by Raj Singh