Weather Financial Storms by Preparing for Emergencies

In an often chaotic world, financial stability is essential for peace of mind. Whether it's an unexpected car repair, a sudden medical expense or even a temporary loss of income, having a well-structured financial plan can mean the difference between a minor inconvenience and a major crisis.

To help beat back these unpredictable financial storms, we frequently advise customers about the importance of creating an emergency fund, along with adopting other prudent financial strategies. While every individual’s financial situation and needs are different, here are a few general guidelines to prepare for and navigate through financial storms effectively

Emergency Fund

An emergency fund is a dedicated account set aside for unforeseen expenses or loss of income. This account should be easily accessible in times of emergency and garner interest to help it grow over time. This financial buffer can help keep you from falling into debt during tough times and provide peace of mind knowing you have a safety net. Here are a few things to consider when setting up your emergency fund:

1. Determine your emergency fund need: Many financial experts recommend having 3-6 months’ worth of living expenses in your emergency fund. There are many factors to consider when determining your ideal emergency fund amount, such as the number of incomes in your household, whether you have children, and more.
   
   After you have calculated your essential monthly expenses, including rent or mortgage payments, utilities, groceries, transportation and any other essential costs, multiply this amount by the number of months you want to cover to obtain your emergency fund savings goal. If you do not have the funds set aside to reach this goal immediately, consider setting up an automatic transfer or other automated savings method to make regular deposits into your emergency fund until you meet your savings goal.
   
2. Open a separate account: Keep your emergency fund in a savings or money market account separate from your other finances. This separation helps reduce the temptation to dip into the funds for non-emergencies and still ensures quick access when needed. The interest it accumulates over time will also help the balance grow, even if it’s slow.
   
3. Adjust as needed: Periodically review and adjust your emergency fund based on changes in your expenses or financial situation. For example, if you were renting and now have a mortgage, your monthly expenses have likely changed. In addition, typical large ticket home maintenance or replacement items such as roofs, HVAC, major appliances or other potential costs should be considered in both your budget and emergency fund.

Additional Financial Strategies for Perseverance

While an emergency fund is likely the most important piece of financial preparedness for weathering a financial storm, other strategies can help supplement your financial resilience during difficult financial times and avoid the need to deploy your emergency fund for avoidable expenses.

1. Budget wisely: Create a detailed budget to track your monthly and annual expenses. Understanding where your money goes helps identify areas where you can cut back and allocate more towards savings and investing. Budgeting can be done with simple pen and paper or with one of the many available budgeting apps and online tools.
2. Reduce debt: High-interest and variable rate debt, such as credit card balances or payday loans, can quickly become a financial burden. Paying down these types of debts can stabilize your budget and allow you to allocate more of your income toward savings and investments. There are many strategies for paying off debt, but two of the most common are known as the “debt snowball” and “debt avalanche.”
   • Debt snowball method: Paying off your debt in order from the smallest balance to the largest balance.
   • Debt avalanche method: Paying off your debt in order from the highest interest rate to the lowest interest rate.
3. Insurance: Adequate insurance coverage is crucial in protecting you against major financial setbacks. Health, auto, homeowners or renters, and umbrella insurance can prevent or reduce the impact unexpected expenses have on your financial stability.

Review your policies regularly to ensure you have sufficient coverages for each type. You should also consider life insurance if there are family members or others who rely on your income for their financial wellbeing.

1. Stay flexible: Financial plans should not be written and then forgotten. Life circumstances change. Getting married or divorced, the birth or adoption of a child, purchase of a home, retirement and other milestones will impact your financial strategy. Regularly review and adjust your financial plans to stay aligned with your goals and current situation.
2. Diversify income streams: Explore opportunities to add additional revenue streams, such as freelancing, part-time or gig work or investing in income-generating assets. Multiple income streams provide a safety net if one source is disrupted, especially if relying on a sole source of income.

Weathering financial storms requires both proactive planning and detailed execution. By establishing an emergency fund and adopting wise financial practices, you can build a financial foundation that can withstand unexpected challenges.

Remember, the goal is not only to survive financial storms, but to remain financially secure throughout and after the storms have passed. With careful planning you can navigate through financial uncertainties with both confidence and peace of mind!

OMB and its affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decision.