Life is like the MLB’s best pitcher, throwing all the zingers. From fastballs to curveballs to screwballs and more, it’s hard to predict what’s coming next. So it’s best to expect the unexpected.
Every September, National Preparedness Month serves as a reminder to do just that. While emergency preparedness is generally associated with creating checklists for supplies and food and making evacuation plans, there’s an often-overlooked aspect of emergency planning: financial readiness. Since emergencies — like natural disasters, health crises, or sudden job loss — can strike at any moment, having a solid financial plan is as essential as stocking up on batteries and nonperishables.
Why financial preparedness matters
Imagine being hit by a hurricane, fire, or another natural disaster. Beyond the immediate physical danger, the financial repercussions can be devastating. Without proper planning, even a temporary setback can spiral into long-term financial instability. In the wake of an emergency, many families find it difficult to recover financially. If you’re a sole proprietor, the repercussions double: According to the Federal Emergency Management Agency (FEMA), 40% of small businesses never reopen after a disaster.
The goal of National Preparedness Month is to encourage you to plan ahead, and this includes taking steps to ensure that you’re financially prepared for any situation. The peace of mind that comes from knowing you can handle a financial emergency is invaluable.
Steps to achieve financial preparedness
Build an emergency fund
An emergency fund is the cornerstone of financial preparedness. It’s a savings account that’s set aside specifically for unexpected expenses, such as medical bills, car repairs, or temporary loss of income. Financial experts recommend having three to six months’ worth of living expenses saved in an easily accessible account. This cushion can help you avoid going into debt when the unexpected happens.
To build your emergency fund:
- Start small: We know saving several months’ worth of expenses isn’t doable for many people. Start with a goal of $500 and gradually increase your savings over time.
- Automate your savings: Set up automatic transfers from your checking account to your emergency fund. Treat this as a non-negotiable expense.
- Use windfalls wisely: Allocate tax refunds, bonuses, or any unexpected income to your emergency fund to boost your savings quickly.
Review and update your insurance policies
Insurance is another key component of financial preparedness. Whether it’s health, life, home, or auto insurance, having the right coverage can protect you from financial ruin in the event of an emergency.
- Health insurance: Ensure your health insurance plan covers essential medical services and review your coverage regularly to accommodate life changes, such as getting married, having children, or caring for aging parents.
- Homeowners or renters insurance: Make sure your policy covers natural disasters that are common in your area, like floods, hurricanes, or earthquakes. Don’t forget to document your belongings for insurance claims.
- Life insurance: Life insurance provides financial security to your loved ones in case of your untimely death. Evaluate your policy periodically to ensure it meets your family’s needs.
Create a financial emergency plan
A financial emergency plan helps give you peace of mind. It doesn’t need to be complicated, more so a checklist of To Dos in the event of an emergency.
- Important contacts: List essential contacts such as your insurance agent, financial advisor, and bank.
- Document organization: Keep important financial documents like wills, insurance policies, and account information in a secure, easily accessible location. Consider digital backups for added security.
- Income and expense management: Know how you’ll manage your finances if your income is disrupted. If you don’t have savings, think about expenses you can cut out and make a list of potential sources of extra income.
Reduce debt
High-interest debt, like credit card balances, can cripple your financial health during an emergency. Focus on reducing your debt to improve your financial resilience.
- Pay off high-interest debt first: Use the avalanche method to pay off the highest- interest rate debts first while making minimum payments on others.
- Consolidate debt: Look for a lower-interest loan to make payments more manageable.
Stay informed and prepared
Financial preparedness isn’t one and done. It’s important to regularly review your finances, update your emergency plan, and adjust your savings goals as needed. Stay informed about potential risks in your area and consider how they could impact your financial situation.
Financial education plays a vital role in achieving preparedness. Understanding basic financial concepts such as budgeting, saving, and investing empowers you to make informed decisions. Take National Preparedness Month as a cue to make your first emergency plan or to review the one you currently have in place. While you never want to use that plan, having it at the ready is a wise step in your financial wellness journey.
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