No one likes to think of worst-case scenarios. A mass layoff at work, a broken water pipe flooding your home, or a family member suddenly dying – there are so many possibilities that can change our lives in an instant. But just because it’s hard to think about doesn’t mean you shouldn’t consider the possibility of unforeseen events. Being financially sound should prepare you for life’s “what ifs.”
Financially preparing for the unexpected is a combination of using up your 401(k) to cover emergency expenses (never a good idea, even if you can avoid it), and having a financial plan to cope with whatever happens. It’s the difference between having the reassurance that you’re ready. . Here are our top five strategies for financially preparing for sudden (and expensive) unexpected expenses.
create an emergency fund
You’ve probably heard of emergency funds. You’ve probably heard it called the “Rainy Days” Fund. Essentially, an emergency fund is a separate savings account that you rarely use unless there is an economic emergency. It’s up to you to decide what you consider an emergency, but it could be a sudden job loss, a major home repair, an unexpected medical bill, a car repair, or anything else.
Every household needs an emergency fund, but the actual savings will vary depending on each individual situation. As a general rule of thumb, you should have 3-6 months of income set aside as an emergency fund. For example, if you earn $100,000 a year, an ideal emergency fund is $25,000 to $50,000.
Savings may seem like a lot, but if you can’t work for an extended period of time, it’s essential to have enough savings in place. Increasing your emergency fund won’t happen overnight, but there are some easy ways to start saving.
budgeting: Consider creating one if you haven’t already. monthly budget. Prioritize paying yourself first instead of dumping what’s left over at the end of the month into your emergency fund. Set aside a certain amount as an emergency fund by budgeting your bills and recurring expenses. Getting into the habit of giving regularly, even if it’s a small amount, can help your savings grow over time.
automate your savings: Most banks and financial institutions allow account holders to create automatic transfers between accounts. After you create a savings account specifically for your emergency fund, tell your bank that you want to automatically transfer a fixed amount each month from your regular checking account to your emergency fund. Taking a “set it and forget it” approach is the most effective way to increase your savings without doing anything.
supplement your income: We’re officially in the golden age of the sideline, and it’s easy to see why. Inflation hits our wallets hard, student loan debt Budgets are under pressure and house prices continue to rise. A recent survey found that 50% of millennials have a side job, earning an average of $810 extra per month.1 If you’re having trouble juggling household finances and increasing your emergency fund, you may be able to increase your budget with a temporary side business. This is a great way to quickly increase your emergency savings.
Check insurance coverage
One of the most effective ways to financially prepare for the unexpected is to incorporate proper insurance into your financial plan. There is a huge amount of different types of insurance policies available, but the four main ones for millennials are:
- Health insurance
- Homeowner (or Rentor) Insurance
- car insurance
- life insurance (if you have someone dependent on your income)
Many factors go into choosing the right type of insurance for you and your family. It can be daunting to consider all the options alone, but we are here to help you through this issue, especially as it relates to the rest of your financial planning.
When evaluating your insurance needs and choosing the right type of coverage, you should consider the following:
Assess risks and vulnerabilities: It is impossible to predict the future (unless you have a crystal ball), but it is possible to assess current risks and potential vulnerabilities. For example, if you have a family history of health concerns early in life, getting stronger health insurance may be a wise choice. Or, if you’re about to have children, a 20-year term life policy will ensure that your growing family is covered should anything happen to them.
Survey and comparison: Not all insurance policies and insurance companies are created equal. You need to compare policies side-by-side to understand what is covered, what is not covered, what is out-of-pocket (deductible), and how much you have to pay per month (premium). As you consider your options, be sure to compare these policies to your “wish list” to find the one that best fits your budget and coverage needs.
Establishing a financial safety net
While contingency budgets and insurance policies provide the resources to successfully manage unforeseen financial disruptions, there are some proactive ways you can work to avoid them in the first place.
Diversification of income sources
You’ve probably heard the investment adage, “Don’t put all your eggs in one basket.” Spreading your holdings across multiple assets reduces risk. Suppose all your investments were in one particular stock of his, and tomorrow without notice that stock closed. You will lose your entire portfolio. But if you have other investments embedded in your portfolio, the blow from this stock will be softened. This is why I encourage my clients to invest in index funds and ETFs rather than owning individual stocks.
Well, so is income. Relying on her one employer to pay for a particular skill set is more dangerous than people think. Work with your financial advisor Find ways to generate multiple streams of income (which may include the aforementioned side hustle) in addition to a diversified investment portfolio. Another source of cash inflow, such as dividends or rental income, can mitigate the economic impact of sudden unemployment.
Create a debt management plan
The less debt you have, the less recurring financial debt you have to pay each month. Make debt repayment a budget priority to ensure future cash flow. Consider debt consolidation or refinancing options. These options help reduce the amount of interest accrued on your debt.
There are different strategies for dealing with debt, but consider starting by paying off unsecured debt at the highest interest rate first. Unsecured debt such as personal loans and credit cards tend to have the highest interest rates.
establish a line of credit
A line of credit is a handy tool to have in your pocket. By applying for a line of credit now, you will have immediate access to funds if you need them. If you own real estate home equity line of credit is based on residential property and can offer lower interest rates than credit cards. You may get a fixed rate introductory fee for 6-12 months, after which the price fluctuates. You can also open a personal line of credit, but unsecured lines of credit are riskier for the lender and can result in higher interest rates.
Focus on long-term financial planning
While we’ve focused on how to prepare for the unexpected, it’s also worth mentioning “what to expect.” Long-term financial planning is very important as it balances current obligations with future goals such as retirement. When you’re doing everything you can to prepare for the future, it’s much easier to deal with unexpected financial needs without sacrificing your long-term goals.
Keep contributing to your retirement savings account, such as your IRA or 401(k). If you haven’t started building your retirement savings plan yet, let us help you determine how much money you need to retire comfortably and what we can do together to get there.
You probably have other goals, and we work with you to build a diversified investment portfolio that reflects those goals and your unique risk tolerance.
Reassess and update financial plans regularly
Just like going to a doctor, it’s a good idea to get regular checkups from a professional to assess your current financial situation. Your life is dynamic and constantly evolving. This means that the financial plan you created five years ago may no longer work for your needs and goals today.
As you move through life stages and experience new situations (marriage, starting a family, changing jobs, etc.), adjust your financial plan to always reflect your current needs.
Enjoy the Peace of Mind That Preparation Brings
Being financially prepared brings an incredible amount of peace of mind. Facing an unexpected financial emergency is never fun, but having the resources to deal with it without sacrificing other financial goals is important. A big step towards financial independence.
Although many of the steps above can be performed independently, it may be helpful to consult a financial advisor first. Saving for retirement, for example, is a one-time thing and can be daunting to tackle alone. Feel free to contact us if you would like to discuss any of the tips here. we. We will be happy to review your current standings and resolve any concerns.
source:
1Survey: 39% have a side job and 44% always think they need a side job
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