A 6-Step Guide to Preparing for Financial Emergencies

iQuanti: Preparing for a life emergency can seem daunting, but the reality is most people will face one at some point or another. Whether it be a layoff, an injury, or a death in the family, a financial crisis can hit at any time, so it is important to be as prepared as possible with your finances.

This guide will provide the steps necessary to ensure you're prepared for any emergency that might come your way.

1. Thoroughly Analyze Your Finances

A great first step in preparing for a financial emergency is to know where you stand. This means combing through all of your financial accounts and taking stock of how much money you are bringing in compared to how much is going out. Within this, you can also set a budget that helps you understand what your needs and wants are so you can filter between them accordingly.

2. Pay Down Debts

One sign of financial health is having more assets than liabilities. Assets are the things you own that provide value and economic benefit. On the other hand, your liabilities include debts like student loan payments and credit card balances. Paying down your liabilities, also known as your debts, can open your budget up to saving more in case of an emergency. 

If you're struggling to balance your monthly expenses and paying down debts, you may want to speak with lenders to see what your options are, such as extended payment timelines or lower monthly payments. 

3. Grow Your Emergency Fund

After tightening your budget and working to pay down debts, a good next step is to divert more money into your emergency fund specifically, which can be a simple savings account with your financial institution.

While the money in a traditional savings account won't grow like other, more lucrative investments, the appeal is that the funds are accessible when you need them and safe. Experts recommend between three and six months of total living expenses saved in the case of job loss or other life changes that leave you without your normal income. 

4. Invest in Insurance 

Insurance is one of the wisest decisions you can make as you enhance your financial preparedness. While health and dental insurance are usually the first considerations when opting for insurance, there are many more options out there that can also help combat sudden financial strife, such as life insurance, homeowners' insurance, and personal liability policies. 

In the case of a term life insurance policy, you will pay a premium that will result in a lump sum being paid out to beneficiaries in the case of your death that can be used for any need. Whether it be funeral costs, credit card debt payments, mortgage payoffs, or similar, investing in the best life insurance policy can be a great tool. This can also make a huge difference in securing your family's livelihood and protecting assets that you've worked hard to build over your lifetime. 

5. Learn to Think On It

When it comes to making huge life changes, a great tool is to avoid impulsive decisions. Making a rash decision, usually fueled by emotions, can result in tragic financial loss and cost you more in the end.

This isn't only for large purchases like a new home or car but also for offloading assets in fear of the market. It's important to wait and truly think through the change or consult an expert who can provide guidance on your best options, rather than you having to make the decision alone. 

6. Create a Fail-Safe

One last option to preparing for financial hardship is to create a worst-case scenario option for accessing funds in a time of need.

Despite your best efforts, you may find that your savings don't cover what is necessary to maintain your living needs. In that case, credit lines can act as a resource for necessary expenses during a time of transition, but they can't be used indefinitely. Also, keep in mind that using credit to stay afloat can result in greater financial hardship down the line. Be sure to only use what is necessary, and again, this should be reserved as a last-choice option.