Life is good. You’re crushing it at work, your social life is thriving, you found an exercise regimen that doesn’t make you want to die, and you’ve even been sticking to your budget month after month. “Maybe I’m finally getting the hang of this whole ‘being an adult’ thing” you think to yourself.
But just as you begin to drop your guard, it happens:
You trip during Zumba class and chip a tooth, only to find out that your insurance won’t cover the costs.
A pipe bursts while you’re gone for the weekend, leaving you with thousands of dollars worth of water damage.
Your dog swallows a sock and requires $10,000 emergency surgery to remove it.
Your job undergoes changes in management and your role is eliminated, effective immediately.
Whatever the situation may be, life sure has a funny way of throwing curve balls when you least expect them…or when you’re least prepared for them.
In 2021, a survey from Bankrate found that fewer than 40% of Americans could pay for a $1,000 emergency with their savings – the rest would have to depend on loans and credit cards to cover the expense, likely accruing interest charges along the way. Talk about going from bad to worse.
Trust us when we say that the last thing you want to worry about when you are experiencing an emergency is “how the hell am I going to afford this?” This is why it is in your best interest to proactively prepare for financial emergencies – so that you can focus on handling the emergency at hand knowing that the financials are covered.
Here are six ways to prepare for a financial emergency so that you can bounce back faster and with as little stress as possible.
1) Open an emergency fund in a HYSA
If the name didn’t give it away, your emergency fund is going to be your financial flotation device on the stormy seas of your personal emergency. So if you don’t have one already…let’s fix that. Like, right now.
An emergency fund is your number one top financial priority, because it is money set aside specifically for use in the case of an emergency. That means that when an emergency strikes, you don’t have to dig into your savings or reach for the credit cards – you can fall back on your emergency fund while staying on track of your financial goals.
We typically recommend having 3-6 months of essential expenses saved in your HYSA emergency fund, but with inflation on the rise and the economy being in a state of volatility, we suggest bulking that up to 9 months of expenses if possible.
Don’t miss out on this tip: your emergency fund needs to be saved in a high-yield savings account.
A HYSA is just like any other savings account, but it allows your money to earn more interest than in a traditional savings account – up to 18x more! In other words, letting your emergency fund sit in a HYSA allows that money to grow and work harder for you – helping you continuously prepare for an emergency without any additional effort on your part.
Click here for Her First $100K’s HYSA recommendation.
2) Save based on your net worth
So you’ve made a budget, have auto-pay set on your bills, have started an emergency fund in a HYSA, and have automated your contributions to your savings accounts. You are well on your way to financial wellness and emergency preparedness.
But the work doesn’t stop there – one of the biggest mistakes we see people make is that once they have their savings automated, they don’t adjust the amount that they save as their income changes.
It is important to make sure that you adjust the amount that you contribute to your savings (and adjust the amount within your emergency fund) as your earnings and expenses change. This will make sure that your savings remains appropriate to your earnings, and the amount within your emergency fund continues to stay sufficient for your 3, 6, or 9 months of expenses.
An easy way to make sure that you are saving according to your net worth is by using Personal Capital’s Net Worth Calculator: this free calculator will allow you to calculate your net worth in real time as your earnings and expenses change so that you can make appropriate adjustments to your savings as you prepare for financial emergencies.
3) Pay off debt
Paying off debt should always be a financial priority, but it is especially important when preparing your personal finances for a financial emergency.
A financial emergency can spread your budget thin, making it difficult to afford everyday essentials, recurring expenses, and costs associated with your respective emergency. In times like these, paying off debt can feel lower priority in comparison to your other expenses, and it can be tempting to put those payments on pause until you are back on your feet.
The problem with this, though, is that while you put paying off debt on the back burner, those balances will continue to accrue interest and rack up penalty fees, ultimately damaging your credit score and increasing the total amount that you owe. Sounds kind of like trading one financial emergency for another, doesn’t it?
But by prioritizing your debt payoff strategy now, you can reduce your total balances owed so that those balances won’t loom over you as you navigate your financial emergency.
Need help creating and sticking to a debt payoff strategy that works for you and your lifestyle (without making you want to die)? You need Debt Defeater, our bestselling course that will teach you how to make and stick to a debt payoff plan so that you can experience and enjoy the freedom of debt-free living.
4) Invest in appropriate home, car, and health insurance
We know that early into adulthood and your career, it can be tempting to invest in “bare bones” insurance plans in order to save money – we’ve totally been there.
But as we advance in our careers, increase our net worth, and grow our families, it is important that we prioritize investing in appropriate home, car, and health insurance in order to protect the wellbeing of ourselves and our loved ones. While cutting costs up front by selecting a skimpy insurance plan may seem appealing, it is likely that you will end up paying a higher price in the end by lacking sufficient coverage.
5) Invest in life insurance
Listen, if there are two things people don’t want to talk about it’s money and death, but buckle up because we are going to talk about both.
The simple truth is that you cannot adequately prepare for financial emergencies without preparing for the worst case scenario in which you or a loved one needs to use a life insurance policy.
Now we know that you probably think that life insurance is just for people who still use Facebook, but it’s a really important part of your financial plan at any part of your adult life, especially if you’re married, have children, or own a home.
While nothing can completely ease the pain of losing a loved one, life insurance can at least ease the financial stress that often accompanies the loss of a loved one and provide the financial security your loved ones’ need in order to withstand your loss. After all, the last thing you want your family to have to worry about in the case of your passing is how they will financially weather this loss.
We recommend opening a life insurance policy with Ladder, as they offer term life insurance with flexible coverage and affordable prices that can work into most budgets. In fact, you can secure a $1 million policy starting at just $35 a month. Consider that crisis avoided.
6) Create an “emergency budget”
If you have followed Her First $100K™ for a while, then you know that we are big proponents of everyday budgeting. But budgeting can be especially important in the midst of a financial emergency, and it’s never too early to prepare your “emergency budget.”
An “emergency budget” is a bare-bones budget that allows you to afford your absolute essentials…and basically nothing else. This budget should only be used when (you guessed it) you are in the midst of a serious financial emergency and need to save money everywhere that you can.
To create an emergency budget, simply identify and write down all of your essential expenses and their costs. This usually includes things like rent/mortgage payments, utilities, food, debt payments, etc. Total up the costs of those expenses and there ya have it: an emergency budget.
It’s important to be both realistic and sustainable with this process, as you may have to operate on this budget for some time as you recover from your financial emergency. Sure, slashing your food budget to just $100 for an entire month sounds great in theory, but the reality is that living off of beans and rice day in and day out is not an enjoyable or sustainable way to live (despite what any other financial educators may tell you).
Additionally, you want to make sure that you are not cutting expenses that you will come to regret later. While saving an extra $50 a month may be tempting, doing so at the expense of losing your life insurance policy is not worth the risk. From insurance to important car repairs to therapy appointments – there are certain expenses that are always worth the investment as they promote your overall health and wellbeing.
Now it’s important to note that your emergency budget should only be used in the case of an emergency, as it leaves no room for pleasure spending on things that bring you joy or fulfillment – and simply put, that’s not a sustainable or enjoyable way to live. We believe that the way you earn, save, and spend your money should align both with your financial goals and also with the things that bring you joy – and we don’t think severe restriction fits in that equation, except temporarily in the case of an emergency.
Financial emergencies can be scary, but a little bit of planning can go a long way in minimizing the lasting effects of a financial emergency and increasing your chances of coming out on top.
