No one likes dwelling on how it all could go wrong, but this mental exercise could save your finances. Check out these tips below to learn how you can be prepared in an emergency — whatever it may be. A little forward thinking now could help you and your budget later.
Create an Emergency Fund
Think of the emergency fund like an umbrella. You’d pack one if the forecast says rain is on its way, even if it’s sunny when you leave your house. Holding onto it may be annoying, but it’s worth it in case the skies open up on your way home.
An emergency fund is just the same. It may be a challenge to save, but it’s worth the effort. You may not need it, but it’s there in the event you need protection.
Protection from what? Well, it’s different for everyone.
Some people need an emergency fund to cover extended periods off work following an injury or illness. Others might rely on it to pay for household repairs outside of their regular budget.
Because you’ll never know what you’ll need until it happens, it can be tricky to save up for. Most financial experts recommend airing on the side of caution. They say you should set aside three to six months of living expenses.
To find out what this looks like for you, use this calculator. It does all the hard work for you.
Cut down on Spending
Six months’ worth of expenses is a big goal, but don’t be discouraged. This is the work of months or even years of hard work and saving.
The important part is you start, however small your first contribution may be.
If things are still moving too slowly, you can speed up your savings by cutting out unnecessary spending from your budget.
What is unnecessary spending? It’s often the little things that end up using a lot of your expendable cash. Here are some common expenses you should look out for in your budget:
- Parking fees and fines
- Movies and video games
- Data overage charges
- Clothes and cosmetics
Individually, these items may not cost much, but they can add up. If you make these purchases often enough, you could be spending hundreds of dollars that could otherwise be going to your emergency fund.
Remember the 20 Percent Rule
When you’re slashing expenses from your budget, it’s easy to get carried away. In the heat of the moment, you see an unnecessary expense and eliminate it. It’s just that simple.
But ignoring a temptation in real life isn’t always that easy. It can be a challenge to go from spending your cash on anything that catches your eye to nothing at all.
Saving all your cash that isn’t dedicated to the essentials will help you reach your goal faster. But it can lead to burnout. You won’t do anything fun that keeps you motivated.
Most experts recommend following the 20 Percent Rule to avoid saving exhaustion. By this rule, you save just 20 percent of your income to strike a balance between responsible saving and fun spending.
Have Available Credit
Sometimes, an emergency strikes when you’re still building your savings from scratch. That’s just the nature of financial emergencies — it’s not a matter of if, but when, they’ll happen. And sometimes, they come at the worst possible moment.
Although this can be stressful, there’s no need to panic if you’re underprepared. Having an available line of credit can help bridge the gap between your savings and emergency.
A line of credit acts a safety net to your safety net, catching you when your savings fail.
Unlike the average personal loan, a line of credit is a flexible way to pay for things. You can redraw from your available limit once you’ve paid off your balance — just like a credit card.
And just like a credit card, your line of credit can have an impact on your credit score. Lenders such as CreditFresh report your payment history to the major credit bureaus. If you stop by CreditFresh, you can learn more about how and why certain lenders do this.
If you end up withdrawing from a line of credit, pay off your balance as soon as you can — if not in full, then always the minimum balance. Regular, on-time payments will help keep your score from plummeting as long as you’re keeping up with all of your other debt and bill payments.
Bottom Line: Be Proactive!
Unless you’re psychic, you won’t be able to accurately predict what emergency you could face in the future — or when it could happen.
That said, you can be better prepared should something affect your ability to pay the bills, no matter what. Taking a proactive approach to your finances can help you face the music with greater confidence. So start saving money for the next emergency now.