how to prepare for a financial emergency with image showing distressed man

After the recession caused by the Covid-19 pandemic in 2020 (or the 2008 financial crisis or any of the ones that came before), we’re all acutely aware of how precarious our financial situations really are. Things will seemingly be fine for a period of time, until suddenly it’s not fine and you’ve lost your job or your hourse. Or you suddenly find yourself with huge medical bills you can’t pay. Before long, you’re struggling to pay the bills and accumulating massive credit card debt.

These things can happen quickly and suddenly, which is why it’s so important to have a financial emergency preparedness plan. Just like you would if you lived in an area with a high risk of hurricanes, it’s important to plan ahead, stock up, and know exactly what you’ll do if a financial emergency hits.

Luckily, the steps for developing a financial emergency preparedness plan are similar to building a solid financial plan in general.

Preparing for a Financial Emergency

Take stock of your situation

Now is a great time to figure out what you have and where your money goes and needs to go. If you're already in crisis, it is a critical first step.

Start by making a list of all of your expenses. Go back through receipts or credit card statements to estimate how much you spend on food each month. Record all regular bills, including things that will come up later such as property insurance or taxes.

Knowing where all your money is going is critical in making sure you're prepared if catastrophe hits. Sign up to get my free expense tracking worksheet if you need a place to record your spending.

Identify expenses that you can cut or reduce right now

How much of your spending you cut right now will depend upon your circumstances, but most of us have at least a few things that we could cut back on in order to boost our savings. What subscriptions or memberships aren't you using? Is it critical to have all of the cable or streaming options that you currently have?

If you already have a healthy emergency fund, you probably don’t need to cut expenses right now, but it’s a good idea to know which expenses you could cut if something bad happened. And who knows, you might find that saving money in one area will free up resources for something else.

Fund your emergency fund

Take any money you're saving from your lowered expenses and save it. Some people have a separate account for their emergency savings; others just keep a minimum amount in their checking or savings and never dip below that level.

The important thing is to make certain you have enough money saved to weather the financial emergency. Having cash on hand is the biggest thing you can do to protect yourself.

Evaluate your debt

Debt can make preparing for a financial emergency more challenging because you have obligations that don’t go away, but that doesn’t mean it’s impossible.

First, if you happen to be overpaying on your mortgage or student loans, stop and put the extra money in your savings. Remember, the more cash on hand the better.

Second, call your lenders and find out if there are any ways to lower your payments. Perhaps that means refinancing your mortgage. Use an online calculator, such as this one from NerdWallet, to find out if refinancing is right for you.

Now is also a good time to call your credit card companies. Check out this script from Ramit Sethi on how to negotiate a lower interest rate. This can save you quite a bit of money in the long run.

At the very least, you should contact all of the companies that hold your debt and find out exactly what is happening right now. You need to understand exactly what kind of relief companies are offering. If there is a pause on payments, find out when payments will resume and what happens with those missed payments. This way you'll be prepared.

Click here to learn how to make a debt payoff plan so you can get out of debt as quickly as possible.

Protect yourself and your family

Although this seems like a really bad time to be adding more expenses, making sure you are fully insured can help protect you. Health, disability, and term life insurance make a huge difference when bad things happen. Many employers offer these benefits, so find out what coverage you already have and consider purchasing more if you have the resources to do so.

In addition, now is a great time to make sure that you have all of your estate planning documents in order. Make sure you have a guardianship plan for your children, a will, powers of attorney for finance and healthcare, and an advance medical directive. Contact an attorney to set these up for you.

Embrace the uncertainty

Benjamin Franklin is famous for saying that "nothing can be said to be certain, except death and taxes." Maybe we've become too comfortable in our lives and have come to count on too many things. Nobody knows what will happen even later today. All we can do is prepare as best we can and attempt to embrace life as it comes to us.

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