Life's Financial Emergencies: What You Can Do to Prepare
Many people plan for anticipated expenses, like paying for college and saving for retirement. Yet, when unexpected financial emergencies occur, individuals often find themselves unprepared. The fact is a job loss, serious illness, divorce or natural disaster can happen to anyone. Fortunately, there are steps you can take to prepare for a financial crisis. According to the Michigan Association of CPAs, having an emergency fund and adequate insurance top the list in times of urgency.
BUILD AN EMERGENCY FUND
CPAs generally recommend that you set aside money each month to build up a cash reserve equal to three to nine months of living expenses. To some extent, the size of your emergency fund depends on your financial circumstances. If you are married and both you and your spouse work, you may be able to get by with the lesser amount. Having adequate insurance and substantial investments may also lessen the need for a large emergency fund. Regardless of size, the funds should be easy to access. A money market or savings account are good choices.
Develop an emergency budget that shows the expenses you could cut and the minimum amount of income you would need to get by in a financial emergency. Also, think about ways you can increase income. For example taking a second job, renting out a room in your home or turning a hobby into a business are alternatives.
BUY ADEQUATE INSURANCE
Insurance is one of the best ways to protect you and your family. Many people have life, medical and homeowner's insurance, but disability insurance and personal liability insurance are also important. Disability insurance replaces a portion of your income if you can't work because of a disabling injury or illness. Personal liability insurance increases your protection beyond the basic levels provided under your homeowners and auto insurance policies. This is important in today's litigious society, where multi-million dollar lawsuits are becoming more prevalent. Personal liability insurance also covers some losses not typically covered by standard policies, such as libel and slander.
ARRANGE FOR A POTENTIAL LOAN SOURCE
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