Have you ever heard of the saying, “when it rains, it pours?” Rather than being caught off guard by a financial emergency, it’s a good idea to prepare ahead of time. Life has a way of happening. Financial emergencies have a habit of happening at the worst times. You could be unexpectedly laid off from work, your car could break down leaving you stranded at the side of the road or your roof could start leaking. Wouldn’t you rather be prepared than be thrown into a panic? Here are four ways to handle a financial emergency.
Prepare ahead of time
Instead of relying on high-interest debt like your credit card or payday loans, plan ahead of time with an emergency fund. An emergency fund is a savings account dedicated toward covering surprise expenses that come up. Financial experts recommend saving three to six months’ living expenses in a high-interest savings account.
If you can’t manage to come up with that amount right away, don’t fret. Start saving as much you can afford to – say, $50 – off each paycheque until you have three months’ worth of emergency savings stashed away.
Protect yourself and loved ones with insurance
The best way to protect yourself from a financial emergency is with insurance, but the sad reality is many of us are underinsured. In fact, 30 percent of Canadians don’t have any life insurance.
Insurance is there to protect us in many ways, but if you don’t have it, you’ll be stuck paying out of pocket. There are many types of insurance. There’s home insurance to protect your single largest financial asset, your home, there’s auto insurance to protect your vehicle and there’s life insurance to provide for loved ones if you suddenly pass away.
Many people overlook disability insurance – don’t! Your likelihood of being disabled is greater than you think. An average of one in three people will be disabled for 90 days or more at least once before they reach 65 years old. Many employers offer group disability insurance. Find out if it’s enough. You might want to buy further protection with individual disability insurance.
As soon as you anticipate running into financial difficulties, let your creditors know. It’s better to let your bank know ahead of time than after you’ve missed two mortgage payments. Lenders may be able to come up with creative solutions, such as extending the amortization period of your mortgage to reduce your monthly payments, or letting you skip a mortgage payment to lessen the financial burden. Not only does this give you more time, it can help protect your credit score from taking a hit.
Cut your spending to the bare minimum
When you run into a financial emergency, you’ll need to make some tough decisions. Take some time to reevaluate your budget and prioritize your spending. Look at each budget item line by line and determine where you can cut back. For example, while you probably can’t save on your mortgage or rent (unless you move somewhere less expensive), you can cut back on discretionary spending like restaurants and entertainment. Cutting back on spending is never fun or easy, but it’s necessary if you want to keep your financial ship afloat and maintain your good credit score.