Preparing Your Finances for The Unexpected

If you had a financial emergency right now, could you handle it, or would it send your finances spiraling out of control? According to Bankrate’s 2023 Annual Emergency Fund Report, 57% of Americans wouldn't be able to cope with a $1,000 emergency. At the same time, Santander found that 60% of people aren't prepared for an emergency, with 21% of respondents stating they would put emergency expenses on a credit card and 11% would ask family and friends.

According to CNBC’s Financial Confidence Survey, the reasons for the increase in folks living paycheck to paycheck are cited as inflation and/or economic unrest.

It's little wonder that with everything happening in the world right now and many people still feeling the after-effects of the pandemic, financial anxiety is at an all-time high.

But back to financial emergencies and preparing yourself for hits to your income and changes to your circumstances, how exactly can you prepare your finances for the future? Read on for some suggestions you can put into place to give yourself the best chance of recovering from financial strains on your income.

Pay Down Debt

Ideally, your debt should be 28% or less of your gross income. The debt snowball and avalanche methods are popular with people looking to pay down debt.

Debt Snowball

With the debt snowball method, you essentially start small and build up. While maintaining all your minimum payments, you start with the smallest debt you have and overpay your minimum requirements to pay it off. For example, if you have $25 spare per month, put it towards your lowest debt on top of the minimum payment to pay it off faster. Then, once it's paid off, use the $25 and the minimum amount towards your new lowest debt level until it's paid off, and so on.

Debt Avalanche

The debt avalanche method requires you to pay the highest interest debt off first, as this will save you from overpaying on interest. Again, you need to maintain your minimum payments for all of your other obligations at least and put extra into paying off the debt that is charging you the most interest. Once this is paid off, you can use this money to pay the next highest-interest debt until you get all your debt paid off.

Savings Accounts

More than one in five Americans have no savings at all, meaning that if the $1,000 emergency were to hit, they would have no money to help them pay for it. Savings accounts are ideal for emergencies and can give you a bigger buffer should you find yourself in situation of reduced income or without income.

Ideally, you should put away around 20% of your monthly income into a savings account and have at least 3 months' salary at all times should the worst happen.

On top of this, you should be looking at allocating emergency funds and sinking funds, too. As a starter, let's return to this "$1,000 emergency." Saving towards this emergency can help you avoid dipping into your savings and give you a money pot solely for this purpose. This emergency could be car repairs, appliance breakdowns, an illness that stops you from working, or medical bills for an accident while you contact an injury lawyer.

On the other hand, a sinking fund is saving for something you know is coming up, such as Christmas or birthday presents, saving for a vacation, or a big purchase such as a new car or RV, even if not necessarily an emergency.

Invest

Investments can help you protect your income and provide you with money to build nest eggs or savings funds and prepare for your retirement. Everyone should have investments and be looking at putting around 15% of their income into investments.

Investing isn't just for the wealthy or those with experience; these days, many apps and platforms are available to help everyone get started with investing. Some let you invest from a dollar, which is ideal for dipping your toes in. If you want to invest higher sums or diversify a portfolio, you may wish to seek out professional financial advice to help you mitigate risk, determine your tolerance level and the best investments for you.

Insurance

Insurance policies can be a lifesaver if you find yourself in the midst of an emergency. But exactly what type of insurance do you need? Health insurance can help you reduce the cost of any medical treatment you might require. Income protection and disability insurance can provide you with payouts if you are injured and unable to work. Income protection typically covers 50-70% of your gross income. Disability insurance usually costs 1-3% of your income. On a $ 30,000-a-year salary, this will cost you from $65 to $150 per month, and if you need to make a claim, this insurance can pay anywhere from 40% to 65% of your income if you are on long-term disability. Keep in mind that the higher the premium you pay, the higher the payout you will get.

You could also consider life insurance to help you provide financial support to loved ones in the event of your death. If your family would struggle to survive without you and your income, then life insurance is vital to have. You can protect your family's finances should the worst happen to you.

Be Proactive Against Economic Changes

If there's one thing we learned in the past few years, it is to expect the unexpected. Sometimes the unexpected is positive, and sometimes it presents a challenge. Stay abreast of any economic or political changes and be proactive in your financial preparedness. If you notice interest rates will be going up, then you can preempt this by making purchases prior to the rise or cutting down your spending to account for the added pressure this will have.

It might mean that you need to downsize your home or your car. Or making other lifestyle shifts. Whatever you need to do, prepare yourself to protect your financial health and support a healthy financial future.

Plan for Retirement

It's never too late to save for your retirement. You need to plan for at least 70-90% of your current income to be replaced via savings and social security, so now is the time to invest in that 401K. Look at how much time you have left between now and when you want to retire, and work out how much you need to live off comfortably. For example, if your current income is $63,000 per year, you need to budget around $50,000 to $77,000 to maintain your current lifestyle.

If you are lucky to have an employer match for your 401K, then match the employer contributions to get the most from this investment. If you don't have these options with your employer, then a Roth 401K can be your best option. This allows you to withdraw tax-free lump sums once you hit 59 and a half years old, providing the 401K is over 5 years old, too.

Talk To A Financial Advisor

Regardless of what path you take, it can be worth your while talking to a financial advisor who can give you a more detailed breakdown of how you can protect your finances for the future and give you and your family a leg up thanks to your actions today. They will be able to advise on the best protection for your income, retirement options, and the best investments for you to make to give you a healthy return when you need to cash them in.

While it can be tough to plan for the unexpected , you can prepare yourself financially for hard times by putting a few preventative measures in place today. From paying down debt to boosting your retirement funds and savings, you can help your family stay afloat in the face of a crisis that impacts your income at any given time.