Life is unpredictable, and people can be hit with unexpected blows both large and small. But planning for these potentially life-changing difficulties isn’t always easy, and too many folks just don’t manage to do it.
A 2015 Bankrate study showed that 62% of Americans would not be able to cover the costs for emergencies ranging from the very serious (medical events) to the less so (an unanticipated plumber’s visit).
Even more troubling, 26% of survey respondents said they would cover unexpected emergencies by borrowing from friends or family, or using credit cards. Using credit cards for expenses you can’t afford could trigger another kind of emergency – a financial one.
If you’re concerned that an unforeseen crisis might threaten your financial security, take a look at the tips below.
1. Craft a budget
Ideally, before you are blindsided by the unexpected, you’ll craft a budget that will take the possibility of emergencies into account. Knowing you have an emergency savings fund in place to cushion potentially wallet-crushing events could help you sleep better at night and will allow you to focus on more-important things if such an event does occur.
Circumstances will vary, but one goal you can set is to have an emergency account that covers three to six months of essential living expenses. This means mortgage or rent payments, utilities, healthcare costs, car payments, monthly minimum debt payments and the like. Non-essential lifestyle costs such as gym memberships, cable and dining out need not be included; these are items that can be cut back on in times of financial difficulty.
One formula to consider when putting together an overall budget is the 50/30/20 rule. This dictates that 50% of your net income will go to essentials, 20% to savings that include an emergency fund and 30% to lifestyle expenses. These percentages can be adjusted as needed to fit your particular lifestyle, and you may want to put more money toward savings and emergency funding than to lifestyle costs, but they offer a useful guideline.
2. Health-check your plan
Would unpredicted medical bills demolish your savings? It might be time to revisit your options, including disability and long-term care insurance. This could play a significant role in protecting your future, as long-term care coverage can help with needs that traditional health insurance, Medicare and Medicaid do not.
Take a look at your current plan as well, and closely assess the covered and non-covered categories of care, from dental procedures to infertility treatments. If certain categories are not fully covered, even if you are not sure you will need them in the future, you might want to plan ahead to have some extra cash, just in case.
If you have a high-deductible health plan, you may also take advantage of a health savings account (HSA), in which you put aside cash toward paying out-of-pocket for medical expenses using pre-tax dollars. The money grows tax-deferred and is not taxed when you withdraw it, as long as it’s used for medical expenses. It can be used to meet your deductible, and you can roll it over each year, which means you never lose the money even if you don’t use it in any given year.
Your employer might even contribute to your HSA; generally, these contributions would be excluded from your annual income and not subject to federal income taxes.
3. Consider some worst-case scenarios
No one really likes to consider these possibilities ahead of time, but it may be helpful to take 5 minutes and think through unfortunate luck or circumstances, such as if you lose your job.
When it comes to your employment security, not everything is in your control. But what you can control is doing your best to ensure you are an asset to your employer and keeping your skills up to date in our fast-growing technology landscape. The better-prepared you are to meet new challenges, the easier it may be if you find yourself in a situation in which it’s necessary to search for new work.
Whether it’s for an unexpected medical emergency or job loss, the end of a relationship through death or divorce or any number of unforeseen financially hardships, don’t put off planning for the unexpected. If you are financially prepared to manage the worst if it happens, it may make a tough time just a little bit easier.