When times get tough it’s all too easy to lose focus on your financial goals as you attempt to navigate whatever life is throwing at you.
This guide gives you a number of tips and ideas to help you prepare your finances for a crisis.
Create a Bare-Bones Budget
One of the first things you should do to prepare for a crisis is create a plan for you money. Start by drafting up a bare-bones budget.
A bare-bones budget is exactly what it sounds like – the bare minimum you need to get by. Only include your must-pay bills and expenses:
By determining the absolute minimum you need for essential expenses, you’ll have a foundation from which you can plan and project your full budget.
Build Your Buffer
Emergencies are often accompanied by uncertainty. Whether it’s the uncertainty of a paycheck or something else, you can help ease the worry by building a buffer into your budget before a crisis hits.
Building your buffer means allocating your savings toward future expenses.
Start applying any savings you can toward future expenses identified in your bare-bones budget.
Essentially you’re pre-paying the bills as far as your budget is concerned. This will ensure you’ve actually got the money to pay for your essentials regardless of any impending uncertainties.
There are a number of ways you can build your buffer. Here are a few:
- Prioritize your spending and eliminate non-essential expenses temporarily
- Cancel or temporarily pause subscription services
- If you’re paid hourly try to work some extra shifts
- Start a side hustle as a dog walker or shopping for others
- Declutter your home and sell your stuff
You can build your buffer relatively quickly by reducing your expenses temporarily and/or increasing your income.
Manage Your Debt
If you want to truly prepare your finances for times of uncertainty, you need to have a plan to eliminate it.
But paying off your debt can take time. Here are some tips to help you manage your debt effectively so you’ll be better prepared when hard times come.
Add up All Your Debt
The most important thing to know about your debt is how much of it you have as well as what type of debt it is.
Add up all your debt from credit cards to loans and make note of the interest rates and minimum payments.
Consider Consolidating to Simplify and Lower Payments
Assuming you have more debt than you can payoff anytime soon, it may be beneficial to consolidate your debts at a lower rate and/or lower minimum payment.
If you’re at all uncertain about the stability of you paychecks, consolidating your debts into a single, lower payment is a great option to reduce your outflows.
Stop Adding to Your Debt
While it’s usually a good idea to pay down your debt, it’s also dependent on how stable your income is.
If you’ve got a variable income or a job that is susceptible to layoffs or lost hours, it’s more important to build your cash reserves than pay off your debt.
By ensuring you’ve got a large enough buffer to get you through any hiccups in your pay frequency you can make sure you’re not adding to your debt.
If you’ve slashed your spending and built out your buffer to a comfortable level, consider putting any extra savings you’ve found toward repaying your debt.
Credit cards and other high interest debt should be prioritized over student loans and lower-interest debt.
Create a Cash Stash
Some emergency situations may affect your ability to access your money so it’s always a good idea to have some cash on hand.
In our electronic age we’re used to the ease and simplicity of swiping a card. But some emergency situations may make that difficult.
Power outages or communication and internet delays may make it impossible to use a credit card. And if you wait until an emergency hits, you may be trapped or unable to get money out from powerless or empty ATMs.
Prepare in advance by heading to the ATM now. Pull out enough cash to comfortably see you through 3-5 days worth of expenses and store it in your safe at home.
Stock up on Medication
One important area we can easily overlook is medications.
Because of how prescriptions are refilled, it’s not always easy to keep an extended supply on hand in case of emergency.
Check with your pharmacy or insurance company to see if you can get an extra month’s supply or request to switch to a 3 month supply schedule.
Longer term supplies are usually fulfilled via mail order which can also make them cheaper and more convenient.
Build up Your Emergency Fund (Cash Savings)
Your emergency fund should be separate from the buffer you’ve been building. Ideally your emergency fund will only be used or needed in case of a job loss or some other catastrophic impact to your finances.
Focus on Building out a 3-6 Month Emergency Fund
While a popular target number for an emergency fund is $1,000, that’s not likely to take you far in the case of a real emergency.
This $1,000 is usually to shield you from having to take on debt for more unexpected but inevitable expenses like car repairs.
Instead of relying on your emergency fund for these things, consider starting sinking funds to save for them over time.
The point of an emergency fund should be to get you through times of hardship you couldn’t have expected. Like a natural disaster or a quarantine during a worldwide pandemic.
The goal is to get to build up 3-6 months of savings.
I know how impossible that feels, but refer back to your barebones budget and aim to hit those numbers one month at a time.
Being able to afford the essentials during a true emergency will make for one less thing to stress about when the rest of your world is in chaos.
Keep Your Emergency Fund in a Safe Place
A true emergency fund will end up being a pretty big amount of money so you’ll want to make sure you house it in a safe place.
Ideally you’ll want to put it someplace where it can earn a bit of interest. I’d suggest putting it in a high interest savings account.
Don’t Invest Money You May Need Within 3-5 Years
Whatever you do, don’t invest your emergency fund.
While investing is a good long term strategy to grow your wealth, you don’t want to run the risk of losing a percentage of your emergency fund if the market goes down.
Especially if the downward trend coincides with your emergency need.
Keep your emergency fund safe in an easily accessible, secure savings account.
Automate Your Finances
Automating you’re finances is a great way to build your savings and credit so you’re prepared if an emergency strikes.
Having your finances automated will also ensure you continue to make progress toward your goals without having to remember or even think about bills and savings in times of crisis.
When you’re dealing with an emergency situation, managing your finances may take a backseat to other more pressing concerns.
Remembering to make a deposit into your emergency fund will likely not be at the forefront of you thoughts when you’re in the midst of an emergency.
And depending on the emergency, you may not even have access to your bills to know how much is due and by when.
Automating your finances can help you work toward your goals today and help you keep things in order in the future if your focus is elsewhere.
Create an Extra Income Source
One of the best ways to prepare yourself for a financial crisis is to diversify your income streams.
Consider starting up a side-hustle doing something you enjoy like
If you’ve got a gift for making crafts or baking tasty treats you could start selling your goods.
Or maybe consider
A side-hustle may not ever replace your income, but by diversifying it you can help shield yourself against times of financial hardship.
Earn extra money shopping! Pick and deliver the items that customers want and get paid for it. All on your own time schedule!
Review Your Insurance
Insurance is an area we often set and forget, but it’s an important area of your finances to make sure you’ve got in order if you’re preparing for an emergency.
Evaluate the different policies you have to make sure they’re sufficient.
Also, consider adding any extra coverage you may need if you’ve had significant life changes since the last time you checked our insurance. Marriage, children, divorce, and death are all things that may have an impact on your insurance needs.
Finally, shop around and make sure you’re getting the best rates for your policies.
What to Do When a Crisis Hits
Assuming you’ve followed some of the steps above, you should be in a better financial position to weather an emergency. But what if that crisis hits before you’ve had time to save up and prepare your finances for a crisis?
Here are some extra things you can do to help see you through financially in tough times.
Optimize Non-Cash Assets
If your income is impacted during a crisis look to non-cash assets to see what additional types of funds may be available to you. Some places to look that you may not have considered include:
- Credit card rewards – Log in to your credit accounts to see if you can redeem unused points for cash or gift cards you can use toward purchasing necessities.
- Gift cards – Check your drawers and purses to see if you’ve got some stray gift cards laying around.
- Frequent flier miles for travel – I’m sure I don’t need to tell you that travel is expensive. Especially if it’s done at the last minute. Check your frequent flier balances to see if you might have some miles saved up that can lessen the blow. Also, check around with friends and family if they’re willing or able to donate some of their miles.
Another place to look is your fridge. Food spending can easily drain your funds. Take on a pantry challenge and get creative by making meals only from what you already have.
Combine a pantry challenge with meal planning to save money on both the purchase of food and reducing waste.
Reevaluate Large Expenses
If you’ve been saving up for a big purchase like the perfect car or a family vacation it can be heartbreaking to put it off.
But in uncertain times, it’s best not to make any large purchases, even if you have the cash on hand (and especially if you don’t).
Since you have no idea what’s going to happen when a crisis hits, it’s important to have savings and cash flow to see you through it.
We made this mistake when paying down our debt.
I completely liquidated our cash reserves to be done with the credit card bills, only to be hit with a double whammy in lost rent and a delayed paycheck.
Looking back, I’d much rather have spread out our debt payments and kept our cash reserves filled.
Don’t Make Any Long Term Decisions Based on Short Term Fears
It’s easy to get caught up in fear and hysteria of the unknown in the midst of a crisis. But try not to let that fear guide your decisions.
While you’ll no doubt benefit from re-assessing your priorities and spending, recognize your long term goals are called long-term for a reason.
If you get lured into trying to time the market, statistically you’ll only succeed in guaranteeing your losses.
Also, while your immediate needs may dictate some temporary changes, don’t sacrifice your long-term goals for short term relief.
When a crisis hits we’re all to likely to add to the stress if we’ve been ignoring our finances leading up to it.
By following the advice above you can make sure that your money situation is a source of comfort not despair in times of emergency.