Emergencies are tough to predict and even tougher to prevent—but what you can do is prepare. Whether it’s a natural disaster, unexpected job loss or sudden crash in the stock market, a little financial foresight can make a big difference in helping you handle the unexpected and recover more quickly.
Read on for six ways to emergency-proof your finances.
1. Start an Emergency Fund
According to the experts, an emergency fund should contain enough cash to cover three to six months of living expenses. It’s a smart idea to create a separate savings account for your emergency money, so that you’re not tempted to use it for anything besides a critical unplanned expense. In addition, make sure that your emergency savings is liquid: not tied up in stocks, or bonds, or any other investment that might make it difficult to access your money. Check out the HUECU blog for more guidance on how to start your emergency fund and set a savings goal.
2. Keep Your Finances in Good Shape
It’s much easier to handle an emergency if your everyday finances are already in a strong state of health. Aim to pay off your entire credit card balance every month, refinance loans as needed to take advantage of lower interest rates, and keep a budget to track household expenses and spending. If you need additional support developing healthy financial habits, get in touch with the financial counselors at GreenPath. As a benefit of Credit Union membership, all members have free access to the GreenPath Financial Wellness Program, including debt counseling, credit report review, and more.
3. Find the Right Insurance Policy
Insurance is an investment in future financial protection. The right insurance policy will help you recover faster after an emergency; protecting your assets, your finances, your loved ones and your health. Consider a home or renters insurance rider to protect items of greater value, or to increase your protection from certain natural disasters. Life insurance is useful to protect the finances of a dependent spouse or children. And, increasing coverage limits for your auto or home insurance might be a smart idea if you’re concerned about emergencies on the road or closer to home.
4. Protect Your Physical Assets
Being protected in an emergency also means looking after physical assets. Put important documents—such as birth certificates, living wills and medical directives—in a locked fireproof safe box in your home. Items and documents which you don’t need to access regularly can go into a safe deposit box at your credit union or bank. Keep a record online of where your documents and personal effects are, so that if the worst should happen, you immediately know where to go to find the important stuff.
5. Know How to Borrow Smartly
Understanding the ins and outs of smart borrowing—before an emergency occurs—will help you to make the right financial choices in a difficult situation. Your best option is to have a credit card reserved for emergencies; preferably one with no annual fee and low APR. If you need to borrow money during an emergency and credit cards aren’t an option, consider a home equity loan or line of credit, to take advantage of low interest rates. Borrowing funds from your Roth IRA is another option, but keep in mind that you will likely face a 10% penalty and income tax. Still, it’s better than working with an unsavory lender. At all costs, avoid payday loans or any lender offering fast cash with high interest rates.
6. Plan for the Retirement
Emergencies can be tougher on your finances if they happen post-retirement, when you’re not bringing in a regular paycheck. Plan for retirement by maxing out any employer-sponsored retirement accounts and by starting an individual retirement account (IRA) or Roth IRA. Aim to deposit the maximum possible annual contributions on these accounts whenever possible. If a stock market crash does occur when you’re in or nearing retirement, don’t panic and pull all of your money without first consulting a financial expert, who can advise you on the best way to handle this kind of emergency.