Unexpected events come in all shapes and sizes. When they begin to unfold, the true depth of one’s preparations comes to light. Being financially prepared for them will help alleviate the stress that often walks hand-in-hand with being unable to tackle unforeseen expenditures. Being prepared also keeps the debt collectors from your doorstep.
Despite these kinds of events being a fact of life, a great proportion of households in the U.S. are still largely financially unable to cope, regardless of their material well-being. Recent studies show that there’s an almost irrelevant discrepancy between low-income and moderate-income households’ ability to handle unexpected events, which entails the presence of a more serious issue – financial knowledge (Brobeck 2008).
How financially knowledgeable are you? Have you thought about unexpected events? This article should give you an idea about possible holes in your contingency plan and what you can do about them.
Expect the Unexpected
While ‘expecting the unexpected’ might come off as the worst cliché alive, it really should be a rule by which to live, and one that people still tend to ignore the most.
Without the realization that unexpected events can beset you from all sides with little-to-no warning, you’ll never make the first step towards being financially prepared. Try to foresee what could go wrong. You don’t really need special powers to do that. They do come in handy with just a bit of information and rational thinking.
Are you living in a dangerous area, prone to violent outbursts from Mother Nature? Earthquakes, tornados, floods, blizzards, and fires can all put an almost unbearable burden on your finances. Are you healthy now? Can you say the same about tomorrow? How old is your car? These are just some of the questions to ask yourself even to begin navigating your funds in the proper direction.
The first step to make certain you and your family can overcome the unexpected is to think about such situations and stop living from month-to-month. This is easier said than done, but with just a bit of willpower and some guidance, you can make it happen.
Certainty with Insurance
Perhaps you’ll see this as a given, but you’d be surprised at how many people are willing to gamble against these odds.
Being insured increases your monthly expenditure, but it protects you against sudden and overwhelming expenses that come from unforeseen events such as illnesses, accidents, or even death. Additionally, if you live close to potential natural disasters, insurance against these events is also highly recommended.
This is why health insurance and life insurance should be on your list of preemptive actions. Life insurance supports your family in case you pass away. If you already have insurance, you’re probably aware of your reasons and have a good foundation on which to build your rainy day funds.
If not, this should be an absolute must. If you’re financially unprepared, medical bills or sudden car repair expenses will set you back months.
Liquidity is Stability
After setting up an insurance plan, the single best way to be financially prepared for unexpected events such as job loss is liquid assets.
Most of all, it’s important to have liquid cash (easily accessible) that you can immediately use when something goes awry. Emergency saving is a willful sacrifice portion of your funds so that you have resources when you need them the most, i.e. when an unexpected event hits. We say sacrifice because that is exactly what it is – foregoing instant gratification that arises from spending money so that you can save up for the future (Collins & Gjertson 2013).
For many people, this is exactly where all the problems arise – at least for those who consider the unexpected. Either they don’t like the idea of giving up immediate pleasure or never realize their plans to save money. They keep spending it all and hold out for next month’s paycheck.
We’ve already established that financial knowledge is crucial to financial preparation in case of unforeseen events. This financial knowledge is even more so than the income that an individual accrues. Now, we get to the second important issue and an obstacle to maintaining emergency funds – personality.
We all possess varying degrees of willpower and self-control, but there’s one easy goal to set that will allow you to push through the initial rejection of saving. While it’s considered good to have enough resources to support you for six months in case you lost a job, start off with a more modest goal – three months (Robb & Babiarz 2013).
When it finally happens and an unexpected event befalls you, you’ll be ready. Hopefully, your insurance will soak up most of the expenses that occur, but you can count on your emergency funds, mitigating the rest.
After this happens, it’s important to maintain rationality and avoid the pitfall of thinking you’re off the hook. When you’ve nibbled on your rainy-day funds or possibly spent the entirety of them, it will be high time to re-evaluate your position as soon as possible and work toward amassing new emergency funds.
Both individual personality traits and financial knowledge play a role in how well you’re equipped for dealing with unexpected events. Saving up will require a great deal of self-control and not a small measure of getting yourself better informed. The most important thing to remember is that being financially prepared is a process.
The sooner you get started, the better. Don’t expect you’ll suddenly be able to store enough money to last you a thousand winters – take it easy and work on it. The more time you spend putting money aside, the better you’ll be prepared for anything life can dish at you.
- What Investments Are Considered Liquid Assets?
- Tips for Financially Preparing for Unexpected Events
- How to Prepare for Unexpected Expenses With a Budget & Money Management Plan
- Start an Emergency Fund