When it comes to personal finance, the most common mindset is to think about what’s expected. For example, most people don’t start saving money until they know what they want to spend it on. This misses an important part of personal finance, though, which is emergency expenses.
Emergency expenses are a broad category. They are, quite literally, anything and everything that a person might experience which presents additional cost. Many people will rarely consider them until they occur, which only results in a snowball effect of catastrophe. It’s easier to deal with a financial emergency when there’s a plan in place. With that said, let’s take a look at five common financial emergencies and what can be done about them.
Job loss is the most obvious financial emergency that a person might encounter. It’s also one of the hardest ones to plan for, since for most people it represents a loss of all income. There are a few ways to be prepared for such an event, though.
The easiest way to deal with losing a job is to have an emergency fund. Even if a person losing his or her job qualifies for unemployment benefits, these usually take some time to be approved and normally don’t completely replace the lost income. Experts usually recommend having three to six months of expenses in an emergency fund. While many people turn to credit cards in these circumstances, that’s a dicey maneuver that’s best to avoid, if possible.
In the world of financial emergencies, vehicle trouble ranks very close to job loss in terms of the potential for disaster. For many people, having a reliable vehicle is a necessity to make it to work and keep up with life’s errands. Because of this, an unexpected breakdown can represent not only a major expense, but also a loss of income.
Beyond having an emergency fund, the loss of income can be dealt with by sharing vehicles with a spouse or roommate, if possible. Another option is to temporarily rely on services such as Uber, which can at least provide transportation while a vehicle is being repaired. An emergency fund is crucial for paying for the repair, but many large auto repair chains offer payment plans if an emergency fund isn’t available.
Household and Mobile Repairs
In a world where technology is everywhere, so is the lingering potential for financial ruin. Refrigerators break down, washing machines stop working, smartphones get dropped – all of these represent instances where personal property can go from working to requiring expensive repairs in a flash. In the case of household repairs, there are only a couple of ways to minimize the financial impact. Extended service plans and emergency funds can both cover the costs. The consensus here tends to be that an extended service plan isn’t worth the money if a person has an emergency fund, so this becomes a matter of personal discretion.
It’s sad but true – many employers don’t offer sick pay. Even for those whose employers do, getting sick can still represent a major financial burden depending on the person’s insurance and the severity of their issue. If someone falls ill, there are a couple of ways to minimize the financial impact. The easiest way is to establish a health savings account – an HSA. HSA’s allow individuals to divert a portion of their income into a savings account, providing a cushion of pre-tax dollars for when health costs do come up. An added benefit is that they function as savings vehicles, so unused funds can later be drawn from for retirement. Because of this, they’re one of the most efficient ways to prevent getting sick from becoming a financial emergency.
Death is another emergency that can manifest itself as a financial emergency. Losing a loved one usually means that there will be funeral costs, which can easily exceed 5,000 dollars. If it’s a spouse that dies, then lost income also needs to be accounted for. Because of this, life insurance is far and away the easiest way to prevent death from bringing financial trouble. Many policies cover funeral costs, and they can also work as a bridge in case a spouse dies and there’s a need to adjust to a reduced income level.
The potential list of financial emergencies goes on. These represent just a handful of the most common ones. The lesson to be learned is that financial planning requires a holistic approach. Planned and unplanned expenses must be accounted for, as many people simply can’t afford not to.
Jessica Kane is a professional blogger who focuses on personal finance and other money matters. She currently writes for Checkworks.com, a leading supplier of personal and business checks.