This post is by our regular contributor, Erin.
Have you thought about what you would do if you lost your job? Or became disabled to the point where you couldn’t work?
What if you were in a severe car accident that left you in the hospital for a week?
It’s a scary and overwhelming thought, especially if you’re young, single, and worried about having enough money to cover everything. But it could happen to anyone at any point.
Having an emergency financial plan is essential to give yourself some peace of mind. We’re going to review some ways you can prepare in advance to lessen the blow of a financial emergency occurring, and I’ll share what my personal emergency financial plan is.
The Importance of Having Side Income
There’s nothing that will help you cope better with the loss of a job than having other streams of income to rely on. That’s why diversifying your income is just as important as diversifying your investments. You’re reducing your exposure to risk!
If I ever return to working full-time at a 9-5, I would still keep some of my freelance gigs because it’s so important to have extra earning power. If you’ve been thinking of starting a side hustle to earn more and work toward having freedom, you can check out our ultimate guide here.
Of course, it’s even better if you already have side income set up, like having a rental property that’s been cash flow positive for a few years, or a blog that’s been producing income every month from ads/affiliates.
Additionally, if you become disabled and unable to perform your job because it’s physically demanding, working from home doing lighter work may provide another solution.
Think About Prioritizing Your Debt
If you lose your job or a major source of income, credit card debt can get in the way very fast. It’s easy to feel like you’re drowning because you can’t afford to pay for your mortgage/rent and utility bills on top of everything else.
Let’s not talk about the fact emergencies always happen when you least need them to!
Unfortunately, your creditors don’t care – those bills need to be paid, too.
Hopefully you’re in a good situation right now. If you’re dealing with a lot of consumer debt (on top of student loan debt), you should strongly consider prioritizing it while you can.
Getting it out of the way now means having more breathing room if you ever lose your job.
At the very least, see what repayment options your creditor extends to borrowers. Some may be willing to work with you and lower your interest rates if you’ve been a long-time customer.
Preventative Maintenance is Key
Another thing you can do to lessen the chance of an emergency happening out of the blue is to keep up with preventative maintenance on things like your home, car, health, and pets.
A lot of people are guilty of ignoring ongoing issues out of fear of cost. I’ve been there, and I’ve seen my parents do the same.
If you’re already in debt, the last thing you want to discover is your house needing a new roof, your car needing a new set of tires, you needing a root canal, or your pet needing pricey surgery.
It’s a huge blow – no one likes receiving that kind of news. However, it’s better to know beforehand because that usually means the “fix” won’t be as expensive.
If you start hearing a weird noise in your car and choose to ignore it, that could result in your engine calling it quits down the road. A small noise might not seem like an emergency now, but it could lead to one.
Ignorance isn’t bliss when it comes to the things you rely on every day. Take care of your property, your family, and yourself now so you don’t have to stress about it later (when you’re possibly in a worse financial position).
The Ultimate Emergency Fund
Typical emergency funds are meant to be used for one-time things that pop up, and then you replenish the fund to prepare it for the next thing that may hit.
Unfortunately, in the event of a death, an emergency fund isn’t going to cut it. Even if you have five figures saved up, it won’t be enough to sustain your family depending on the circumstances.
That’s where life insurance comes into play. You never want to worry about how your family will cope after you’re gone; you want to know they’ll be taken care of. Likewise, if your spouse passes away, you don’t want to worry about how you’ll make ends meet while grieving.
Estate plans, wills, and life insurance are all key parts to any financial plan for those who have dependents or cosigners on loans.
My Emergency Fallback Plan
I’ve seen what not having a plan can do when my dad was laid off several years ago. My parents had been struggling to pay off consumer debt and were living paycheck to paycheck. Any amount they managed to save up (usually around $1,000) was wiped out by home repairs.
Sadly, that was partially because they didn’t have enough money to make repairs when necessary. That’s why preventative maintenance is so important when it comes to your larger assets!
So what would I do if everything went wrong right now, and all my clients (and my fiance) disappeared?
First line of defense: I have a healthy emergency fund because I’m a freelancer (and a worrier). I have 6 months of living expenses saved up.
I’d go down to a bare-bones budget to cut down on dipping into my savings. I’d look to gain new clients by reaching out to all my contacts, letting them know about my availability.
If, for some reason, work was still scarce, I’d move back in with my parents. It’s not ideal, but it beats being stressed out about paying rent.
I’d continue looking for work, picking up a part-time job if needed. Living with my parents would mean being responsible for my student loan payments, cell phone bill, car insurance, gas, my cat, some food, and personal care items. I’m fairly sure I could keep that all below $500 per month, which means my savings would be good for more than a year.
In a worst case scenario, I would apply for some sort of repayment assistance for my student loans so I wouldn’t have to make payments for a few months.
I know – I’m lucky I don’t have kids or a house, so my emergency financial plan is simple and realistic. For others, that’s not the case, and that’s why life insurance can be a good thing to have.
____________________
Creating a financial plan in case everything goes wrong might seem a little extreme, but after witnessing the chaos that can ensue, I wouldn’t be without one. Then again, I’m a realist, and preparing for the worst is a tendency of mine! I’d rather be safe than sorry.
Do you have an emergency financial plan? What would you do if you lost your job or a huge source of income? How do you think you can prepare to bounce back easier?
Check out some of our favorite personal finance resources:
Are you getting the best credit card rewards? Check out the top cash back credit card offers (updated daily)
Make extra money: 15 ways to make money from your computer
Get the First Chapter Free!
Join our online community and get the first chapter of the book Student Loan Solution absolutely FREE!
The flexibility and breathing room of not having debt is one of the reasons we want to pay off our house early, even though it doesn’t make the most sense mathematically compared to investing. For those with families, long-term disability insurance is recommended.
This is yet another one of the reasons why we’re so purposeful about not taking on any debt so as to lighten the stress we’d experience. That being said, we have a healthy EF and cut expenses to the bone. We really don’t have side income anymore but is very much why we diversify as much as we can to help protect against potential issues. We’ve also been putting off getting disability insurance which would also help.
I think having multiple streams of income and an emergency fund are absolutely key to success here. Great tips!
My emergency plan would consist of relying on my emergency fund (which isn’t much right now) along with insurance and my other streams of income if I could no longer work at my FT job for an extended period of time. I live near a lot of family so I know I could always move back in with my mom or someone if things got extremely worse. But after reading this, I think I need to do a better job of preparing and at least beef up my EF to cover a few months of living expenses.
If you’ve got dependents, take you’re various coverages seriously. Short term/long term disability, health and life insurance (and car insurance) are all necessary in my opinion.
We’ve also cut the debt, and built several cash streams, so we feel good about our financial back up plan, but honestly, our back up back up plan is moving back in with our parents. That’s why we’re really serious about keeping ourselves afloat.
Great post Erin! I don’t think very many people have an emergency financial plan, but they should. Things can happen very quickly and sometimes just having an emergency fund isn’t enough.
Pretend to Be Poor Paying off your mortgage early is definitely a hot topic in the blogosphere, but you have to do what makes you happy and gives you peace of mind! My parents were able to retire, sell their house, and pay cash for their next one because they moved to a lower cost of living area. They love not having to worry about a mortgage now. It was a huge source of stress for them before.
FrugalRules Same here, John. It’s good to have that mindset and to diversify as much as possible. After dealing with student loan debt, I’m very mindful of taking on any other debt. It took me a while to even be okay with getting a car loan.
Financegirl Thanks, Natalie! They’re definitely essential.
Chonce Family nearby is always good. I’ve been considering moving further away from mine. It’s a little scary, but it gives me more motivation to make sure I stay in good financial shape in case anything happens. It’s hard to balance saving in your emergency fund with debt payoff, but I know you can make it happen, especially with side income increasing!
Hannah UnplannedFinance Agreed! You never want to leave your family in a rough situation. It sounds like your backup plan is solid, and it’s always good to have a backup backup plan. ;)
BudgetBlonde Thanks, Cat! It’s true. A serious emergency with the house, an unexpected medical bill, or 5 different things happening all at once can wipe out your reserves. It’s good to have everything in place to build back up quickly if that happens.
Good post, Erin. It’s so important that people take the time to plan out what they would do if they suffered a job loss or a premature death of a spouse. We don’t like to think of those happening, but they do occur and more regularly than we realize. Preventative maintenance is a step that I see overlooked so I’m glad you mentioned it. It can dramatically decrease needing to dip into emergency funds if you can things in working order and that includes yourself. Health care is expensive and taking care of your body can save a lot of money now and later.
ShannonRyan Thanks, Shannon! Procrastinating is so much easier than taking care of an issue, especially when we think something “minor” is wrong. I’ve unfortunately seen the effects of that first-hand. Owning a car or a home or having a pet means you need to factor ongoing costs in!
No one likes to think about bad things happening and I think that’s a big reason why so many people are ill-prepared (financially or otherwise) when emergencies happen. But it is so important to be prepared for an emergency so that things don’t get worse. While we do have some money saved up, money alone wouldn’t necessarily solve everything. In the past, I had family nearby that I could rely on for anything. Being so far away from them means my husband and I are on our own and if something happens to one of us it would be very difficult for the other. I think it’s time for us to review our emergency plans aside from our cash savings.
The Guardian just ran an article and it said that less than 30% of Americans have $1000 in savings. There were other statistics, all pretty grim. It’s really hard to build an emergency fund when you’re young but that’s when you need it the most. You’re got young kids, a crappy car, you’re saving for a house…at least that’s the way it was for me. Life is tough. An emergency fund is critical.
Enjoyed the article. Thanks!
Laura Beth
Settle Your Finances I think you’re right, Jessica. People really don’t like thinking about worst-case scenarios and they like to pretend they’re invincible! Except no one is – the most random things can happen, causing us to be in a tight spot. It’s best to be prepared.
Laura Beth @ How To Get Rich Slowly Thanks Laura Beth, I’m glad you enjoyed it! I’ve been hearing plenty of those statistics as well, and it’s pretty frightening. I keep hearing from my own peers that they’re broke and waiting for their next paycheck to arrive. Not good!
I tend to expect the worse and I used to stress about doing preventative maintenance and small repairs on our home. I found out that it was much less expensive than I expected and cheaper in the long run.Getting rid of the debt burden is one of the best things you can do.
dfasdf
houseoftre Glad to hear that, Tre! It can be scary to ask for a quote on things, especially when it comes to a house or a car. But it is definitely cheaper in the long run, and there’s less inconvenience – when something important breaks (like the AC) it’s not fun!
holly@clubthrifty.com Yep, I could not imagine life without an emergency fund. I’d be super paranoid and worried that something would happen all the time.
I am writing this Testimony because am really grateful for what BARRY MORE did for me and my family, when I thought there was no hope he came and make my family feel alive again by lending us loan at a very low interest rate of 3%. Well I have been searching for a loan to settle my debts for the past three months all I met scammed and took my money until I finally met a God sent Lender. I never thought that there are still genuine loan lenders on the internet but to my greatest surprise i got my loan without wasting much time so if you are out there looking for a loan of any amount i would advise you to email Mr Barry via: { barrymoreloans12@hotmail.com } or call (234)8136234670 and be free of internet scams. thanks… Kathie Roper from California, USA.
We have a small emergency fund in place, but I would like to beef it up to a minimum of 3 months based on dual incomes. As far as an emergency financial plan, you’ve given me something to think about. As a married couple, it’s something that my husband and I ever considered…we figured the emergency fund (even if it’s small) was the plan.
lifeandabudget I’m glad it got you thinking! An emergency fund is great to have, but in a true dire emergency, it might not be enough. It’s always good to supplement it with something else.