Throughout our lives we are faced with unplanned events that can have a lasting impact on your finances if you haven’t planned in advance for them. If you or your spouse loses a job or if you or someone in your family suffers a debilitating injury—are you prepared to manage with less income and higher living expenses?Have you planned for how you would manage the financial affairs of your parent or spouse if they were unable to?
More often than I would like to, I have encountered families scrambling to work things out after an unplanned event occurs. This reactive approach can result in disaster for your financial and personal well-being.
So how can you plan ahead for what you hope will never come to pass?
The following recommendations can help you put together your financial emergency toolkit and give you the peace-of-mind in knowing that you have prepared for the unexpected.
Have an Emergency Fund
Everyone should have an emergency fund that they tap into only in the event of emergency financial situations like job loss, injury or illness or other major unexpected event. The rule of thumb is to know your monthly expenses and build cash reserves that can fund 3-6 months of your budget. Having this emergency fund in place can ease the burden in case you lose your job or need to take extended time off due to injury or illness. You would benefit from being able to replace a portion of your lost income until you recover or find new employment. If you do end up needing to tap into this resource, make sure you build it back up as soon as you can.
Figure out How You Can Cut Costs
It can be overwhelming to make decisions in the midst of a financial crisis. Having a list prepared in advance of the non-essential things you can cut from your budget will help you reduce your expenses while you navigate your unexpected situation.
Eliminating things like magazine and online media subscriptions as well as non-essential items like gym memberships or cable subscriptions can make a big difference in how long your emergency fund will last you.
Ensure You Have Enough of the Right Insurance
To avoid having your financial well–being overturned by unexpected events, it makes sense to have adequate policies to cover you and your loved ones. Key types of insurance to consider include:
- Disability insurance — having disability insurance or a supplemental disability policy can help you supplement your income in the event of a medical emergency.
- Home insurance —whether you rent or own it is critical to have a policy that covers you in the event of fire, flood, theft or personal injury.
- Life insurance —though all families’ needs are different, a general rule of thumb is to have life insurance equal to 7 to 10 years of income.
Who has the responsibility to speak for you if you can’t?
Having a plan in place in the event that you are incapacitated or cannot speak for yourself is very important to protect your wishes and help your family make decisions in a difficult time. Living wills, advanced directives and power of attorney are essential to a complete estate plan. Financial advisors and estate attorneys can help guide you through the process of creating and organizing these documents so that, should the need arise, there are no questions about your wishes and needs.
Being prepared delivers confidence.
By following these steps you can be proactive about what to do in the event of a financial emergency. Everyone will feel a greater sense of confidence and comfort when faced with critical decisions. And most importantly, you can avoid significant financial setbacks and stay on course toward achieving your long-term financial goals.
This information is solely for informational purposes. Andersen Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Andersen Wealth Management and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Andersen Wealth Management unless a client service agreement is in place.