Just like you prepare for the worst when it comes to fires and floods, it is also a good idea to prepare for financial emergencies. A financial emergency can consist of anything from loosing your job to an unexpected medical bill. Credit.com gives you five tips for emergency preparation:
1. Savings account – Establish a savings account with your bank and build up the balance so you’ll have enough to cover at least two months of expenses in the event of an emergency. If you loose your job or fall ill, this money will help you pay your bills temporarily. You should save enough to pay the following for a few months:
It’s easy to build up an emergency savings account if you have a small amount taken directly from your checking account or paycheck each month. Plus, you’ll be earning interest on your money while you are preparing for emergencies.
2. Credit card access – It’s also a good idea to have access to credit cards in an emergency. If you don’t have any savings or are struggling with a large expense, a credit card can be an affordable and easy way to deal with a financial emergency. Keep a credit card with a high limit in a safe place just for emergencies. Credit cards can also be used for renting a car, making a long distance call from a pay phone, or booking a hotel room in an emergency. It’s much better to use a credit card for a financial emergency than a payday lender to access extra funds.
3. Emergency documents – Store copies of important documents and cash in a safe place in case of emergency. You’ll need to access these documents if your home is damaged, your wallet is stolen, or if you encounter trouble while traveling. This folder of key documents should be kept with a trusted relative or in a safety deposit box that you’ll be able to access easily. Be sure to include:
4. Know your options – It’s important to have a general understanding of the policies, resources, and options that are available to you in an emergency. Review your insurance policies to see exactly what they cover. Know what your employer’s policies are about taking time off and borrowing money from your 401(k). Investigate how much unemployment you would receive if you were laid off. Think about ways you could reduce your expenses or borrow money if you have to.
In the event of a financial crisis, you should notify your creditors and lenders of your situation right away. Many lenders will allow you to skip or reduce your payments for a short period of time in an emergency.
5. Plan for future expenses – Some financial crises can be predicted. On average, a car requires about $600 a year in repair and maintenance costs. Most people visit a doctor’s office two or three times a year and a dentist’s office once or twice a year. The average family spends between $600-$900 in health care costs per child each year. Christmas gift spending alone usually adds up to $500-$700 dollars.
Keep a record of past financial emergencies and see if you can predict when they might occur again. Planning ahead for these major expenses can help you avoid costly short term solutions such as being forced to use a payday loan. Having a calendar marked with the dates that certain bills are due can help you prepare for infrequent events such as car insurance renewals, birthdays, car registration, and other annual expenses.
Making a few financial preparations now can help you prepare for financial emergencies in the future. If you are currently faced with a money problem and don’t know what to do, read our article on managing a financial crisis.
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