We spend a lot of time blogging about the importance of planning for retirement. But there is another part of financial planning that is just as important, and deserves more attention. What would you do, in the event of a financial emergency?
According to the Federal Reserve’s latest report on the well-being of American households, 18 percent faced a financial crisis in 2015. The reasons for money-related emergencies varies, but were listed as following:
- Medical crisis (36 percent)
- Loss of job (25 percent)
- Reduction of work hours or pay (18 percent)
- Spouse or partner lost their job (13 percent)
- Spouse or partner lost work hours or pay (12 percent)
As far as reasons for financial problems go, these situations probably don’t surprise you. The bigger picture, though, is that most of these situations can happen to anyone. That’s particularly true for medical emergencies.
How prepared are you for a financial emergency? The report also compiled data on emergency readiness. Just over half (54 percent) of respondents said that they could easily cover an unexpected expense in the modest amount of 400 dollars. These respondents said they could pull the cash from their checking or savings accounts, or put the charge on a credit card and pay it off the following month.
However, 47 percent of respondents said they would be forced to sell personal possessions,or borrow the money. And remember, we’re just talking about 400 dollars here! The types of problems listed above would likely make a much more significant impact on your finances.
So how do you prepare? You can’t always guarantee that a crisis won’t strike you, but taking these steps can help you weather a storm relatively unscathed:
- Get debt under control – using a debt counselor, consolidation loan, and so on
- Track your spending for a month or two – see where your money is really going
- Cut expenses where you can. Refinance debts, where beneficial
- Devote some of your income to an emergency savings fund. Save any windfalls (like your tax refund) instead of splurging
If you can establish an emergency fund, you can prevent having to borrow money if you get into a tight spot. Even better, you won’t feel tempted to raid your retirement fund, which could negatively impact your long-term future. For more help with financial planning, give us a call and we’ll be happy to help you.