***This is a Guest Post written by Rebecca Williams. <3 from the Dames***
We’ve written about financial emergencies before (you know, in the lose-your-job way), so it’s always good to get a refresher on how to prepare so you aren’t stuck using your credit card (guilty) or having to borrow from friends.
Everyday transactions require careful financial planning. Nowadays, people generally have prepared budgets for everyday expenses, credit payments, insurances and even personal investments. In a world where money and cash equivalents move society, budgeting has become a standard. For the general public, financial stability means securing one’s retirement, owning a house, and being able to provide a debt-free education for their children, according to a March 2015 survey by Harris Poll for the AICPA.
The same study reveals that respondent who believe themselves to have achieved security were able to do so by improving their finances. The top three ways to do such were to budget, reduce debt, and improve savings. Out of all the respondents, only 35% think that preparing for financial emergencies contributed to their financial success.
What is a financial emergency, anyway?
Financial emergencies are events that are unexpected and whose financial consequences are not ordinarily included in everyday disbursements. These include but are not limited to sudden unemployment, medical expenses, house repairs from calamities or accidents, and legal expenses. They may arise from unpreventable events and may not necessarily be backed by insurances.
Emergencies can be recognized due to its sudden nature or urgency. Taking out an auto loan for a car that you have coveted for a long time is not an emergency – it is a luxury. So are instances like eating out with family, vacations, night outs, and binge shopping- no matter how terrible the reason could be. Financial emergencies are not synonymous with extraordinary transactions – or transactions that have nothing to do with daily necessities like food, utilities, gas, bills, and regular medicine. They are unanticipated and generally unwelcome.
For example, your child may suddenly fall sick and require hospitalization, or a sudden death in the family gives rise to an influx of funeral expenses. Litigation expenses are also possible, especially in cases like accidents where you have no choice but to pay for damages. Financial emergencies also occur in cases when there was indeed money prepared for an event, but was unexpectedly significantly lacking. Overall, emergencies are different from luxuries due to their undesirability and urgency.
Emergencies are unwanted expenses, and people are encouraged to make preparations in order to avoid them and improve their personal economy. Daily Nation stresses that preparing for emergencies is necessary not only for businesses but also for people interested in securing their personal finances. It maintains that it is necessary in order to avoid any step backs if one is caught in an emergency financial situation – especially in cases where an individual suddenly loses their source of income and is unable to provide for their basic needs.
How do we counteract against financial emergencies?
There are several recommendations – one of which is setting up an emergency fund. The emergency fund must be a portion of one’s savings that is hardly touched. It is maintained for the purpose of emergencies and must certainly not be used for daily expenses, especially luxuries. A certain of discipline is required so that the fund stays for its purpose alone – to be used in response for any unwanted financial distress. The same article recommends setting up an allowance to cover for at least three to nine months of expenses.
Insurances are also a reliable method in preparing for emergencies. There are many insurance options available in the market, ranging from health and life insurances, and to those concerned with property like auto and house insurances. Making investments like these can significantly cut expenses from emergencies and set aside a larger portion for other matters where insurance is inapplicable. There are also services available like retirement or college-preparation funds that can give walkthroughs and benefits for effective saving methods and help avoid possible opportunity costs.
Of course, another way is by to ensure one’s spending discipline. By reducing the amount of spending directed at simple wants and luxuries, one can increase savings so that they are reasonably equipped financially in the case of emergencies. Living within one’s means allows more disposable income that can be used for investments like time deposits, securities, stocks, and even property. Investing in home renovations and auto maintenance also ensures that one’s property is less likely to receive damage from accidents and calamities, and can reduce expenses.
Another benefit from good spending habits is the possibility of eliminating debt. Less spending would mean less credit card swiping, improving credit standing and avoiding additional interest charges. It also provides an opportunity to settle accumulated debt.
Debt management is now made more convenient through innovative methods like professional debt settlement services through online debt relief. Investopedia defines debt relief as “The reorganization of debt in any shape or form, so as to provide the indebted party with a measure of relief, either fully or partially, from a huge debt burden.” It includes means such as reducing the principal amount or the interest rates, as well as making extensions as to a debt’s due date.
One of the most common form of debt relief is debt settlement. A typical program assists an individual in saving as much money and resources possible according to their unique financial position, in order to effectively relieve themselves of outstanding credit and settle the debt once and for all. Online debt settlement programs conveniently assist individuals in improving their credit situations, ensuring that they are consequently well-prepared for financial emergencies. Additionally, they provide guidelines that can give an example for their clients to improve their financial discipline. None of these services can provide a full guarantee as to total debt settlement, but they certainly help practice restraint and economic management.
Whether it is through savings, investments, spending discipline or debt /credit control, practicing preparedness for financial emergencies is an important consideration to make for individuals concerned with financial stability. By reducing the risk of unwanted expenses and additional debt, one can take more steps further in realizing his/her financial ambitions.