American consumers has been through a lot in the past few years dealing with unexpected expenses because of market conditions. Investopedia.com explains the Great Recession in 2008 was the latest blow in the economy. The decline in market activity was the largest since the Great Depression that put the country in rock bottom situations.
A lot of people found themselves being laid off and waking up to morning jobless and looking for employment. But the job market has already been affected and opening are scarce and too far in between. This was a tough and dark time for consumers because as the economy is consumer-driven, purchasing power was at an all time low.
There are financial holes to plug up to help prepare for such instances but preparation is better than cure. You need to be on guard and be prepared for unexpected expenses but people might point out that you can never really prepare for the future. The idea is not to see through to the future but be prepared enough to cover the unexpected.
Preparing for financial emergencies
It is not easy to prepare your finances for the unexpected but there some things you can look into to help make it possible. As a lot of financial people would say, it is not easy to accomplish but totally impossible to do.
- Reserve funds. When trying to understand budgeting behavior, it is important to have reserve funds in your overall financial game plan. For most people, this is usually associated with having an emergency fund but it is not the only thing that makes your reserve fund. Unexpected expenses are usually addressed not only by emergency funds but rainy day funds as well. The difference between the two would be the amount and the purpose of each. Emergency funds are for the big unplanned expenses like losing your job while the rainy day funds are for the smaller ones like simple home or car repairs.
- Diversity in income. This is one of the techniques that people usually overlook because they are too focused on their primary office job. There is nothing wrong with this and in fact the better you are with your job, the more secure you can get with your employment. But unexpected expenses might catch you off guard and impact your main source of income. When this happens, you are left to rely on your reserve funds to get you through. One way to address this potential financial problem is diversification of income. It can be a second job or even putting your hobby into good use every weekend. It can even be getting into various investments that brings you income from different sources. This can help you offset any impact on the main income and help you survive financial shocks.
- Appropriate insurance coverage. This is one of those things that you should be doing from day one. Some people might be quick to point out that insurance might not be enough to cover unexpected expenses but at least it can offset a portion of the expenses. It also offers consumers a certain extent of peace of mind knowing that they are covered in terms of emergencies.
- Always have a back-up plan. Emergencies happen when you least expect it so it is best to always have a back-up plan. It can come in the form of knowing the carpool schedule when your car break down to get to work. It can also be simply having spare light bulbs around the house in case the one you are using dies out.
- Strive for early retirement. Choosing to retire early has to backed-up by years of hard work and unexpected expenses can put you off course. You need to be prepared and ready to face these financial challenges if you want to enjoy life earlier than the average retirement age which is at 62 years old according to Gallup.com. It forces you to be more financially savvy and aware of your budget needs.
How to efficiently save for emergencies
We can all benefit from time-tested tips that can help reach our financial goals a lot easier and putting together and setting aside some funds for the future is surely one of them. One problem is that people are not sure how much to set aside and Cbn.com explains that it really depends on your preference and lifestyle. Here are some ways to save some funds for unexpected expenses.
- Commit to a percentage of your income. There are some people that points out that the minimum percentage that you need to set aside from your income is at 10%. But this really depends on you budget and capacity to save. The higher the better but is should not force you to take out loans just to make ends meet. Be sure to allot only the amount that you can put aside so you do not put other areas of your finances in jeopardy.
- Automate the process. One of the money hacks that you need to remember is that automating any process makes it a lot easier especially when you are preparing for unexpected expenses for the future. Even before you get to spend your money, you get to automatically transfer the amount to a separate account already.
- Put it within arms reach. One thing about reserve funds for emergencies is that you need to keep it close in case of an urgent need but not too accessible that you get to use it for unnecessary purchases like shopping during sale events. You need to use it only for its intended purpose.
Common emergencies that can impact your finances
There are a lot of things that can affect your finances in an unexpected way and it will help knowing what they are so you can manage your expectations.
- Losing your job. Getting laid-off is a reality and once that happens, the first thing that in impacts is your income. Unexpected expenses becomes a dagger to your budget because you do not have any income to speak of. This is where your emergency funds becomes a big help because it will tide you through the months that you are looking for a new job.
- Falling ill. Your health is a financial investment because a healthy mind and body helps you earn more. It also helps you stay away from unexpected medical expenses when you get sick. It can be as simple as saving money from the purchase of over-the counter medicines or even expensive medical procedures.
- Natural calamities. There are not a lot of things that you can do when you are with nature’s wrath. It can be hurricanes. typhoons, floods and even fire that started from too much heat. In any case, you always need to prepare your finances to meet such circumstances especially if you live in an area prone to these catastrophes.
Unexpected expenses can throw you out of your financial game. That is why financially preparing for these instances like having a reserve fund and having a back-up plan is important to tide you through some of the most challenging financial times you will ever have.