If a sudden and unexpected expense appeared on your horizon, could your family cover it? The unfortunate truth is that most American households are incapable of facing an emergency without having to absorb some serious consequences.
Despite the fact that the median household income in the U.S. falls right around $61,372, an alarming 40 percent of adults say they don’t have enough money to cover an unexpected expense of $400. When you recognize that $400 expenses happen quite often — from a doctor’s visit to a vehicle breakdown — this isn’t a good position to be in.
Knowing how to handle an emergency in a deft manner could mean the difference between success and a major setback in your life.
Try These Four Tips
Life may be going great right now, but rough patches could be on the way. No household can dodge financial setbacks forever, so it’s vital for you to be prepared for them before they happen. Here are four helpful ways to go about this.
1. Build Up an Emergency Fund
Financial advisors recommend that every household maintain an emergency savings fund that equals roughly three to six months of expenses. Thus, if your monthly expenses are $4,000, this means you need to stow $12,000 to $24,000 in a savings account.
Obviously, many households aren’t able to put away thousands of dollars a month with ease, so this may take time. The crucial thing is to you start right away. A few hundred dollars per month will add up quickly. (Even having “only” $1,000 set aside will put you ahead of most people.)
The best way to build up an emergency fund is to create a budget and automate the savings. Meet with your employer’s HR department and ask them to route a percentage of your paycheck automatically to a separate savings account.
Even three to five percent is better than nothing. And once that money is safely stashed, don’t touch it until you experience a legitimate emergency.
2. Get Clear on the Definition of “Emergency”
Many people struggle with keeping their hands off their emergency fund … particularly once it grows to several thousands. But in order for your fund to perform its job as an insulation against the potholes of life, you have to practice discipline.
When friends suggest you join them on a vacation to the Bahamas, that doesn’t count as an emergency. Neither does a kitchen remodel or Christmas gifts for the kids.
An emergency is an expense that surfaces unannounced and that must be addressed in a swift manner to ensure the health, safety, or financial well-being of your family. Typical emergency expenses include a broken-down vehicle that prevents you from getting to work or running essential errands, a medical bill, a home repair bill to fix an essential system or component, or a funeral.
3. Obtain an Emergency Loan
If you don’t have enough money to cover an emergency expense, don’t simply ignore the bill. An alternative option is to apply for an emergency loan, which typically ranges from $500 to $5,000.
The beauty of emergency loans is that they usually involve a quick approval process and generous repayment terms in regular monthly installments. They also feature much better interest rates than credit cards and other debt instruments to which people too often avail themselves.
4. Be Proactive With Creditors
You certainly don’t want your emergency expense to force the rest of your personal finances into a tailspin. It’s crucial that you approach the matter proactively and avoid the temptation to tip-toe your way around it.
“If you know you will have trouble paying your bills because of your emergency, contact your creditors and service providers immediately,” personal finance expert Jason Cabler writes. “Many people have a tendency to put this off, which results in tons of late fees and nasty telephone calls from creditors.”
Focus on What Really Matters
By being financially prepared for an emergency before it strikes, you can spend less time worrying about how you’ll scrounge up money and more focused on the true issue at hand.
Now’s a perfect time to start building your emergency savings so you’ll be ready to handle whatever comes your way.