It’s an unfortunate reality that millions of people are one bad day away from a financial emergency. While no one ever expects or wants this to happen, it’s a good idea to be prepared just in case. Having a plan in place now may help you panic less in the future. Here are some ways to plan for emergencies and adjust in case they do happen.
Ideally, you already have a budget in place. Whether you’re still working or on a fixed income, knowing how you spend your money is crucial to adapting to a changing financial situation. In a financial emergency, the first thing you’ll want to do is take another look at your budget. Figure out what you spend on essentials—food, housing, utilities, and medication are all musts. After that, you can take a look at nonessential spending. If there are things you pay for but don’t use, cut those subscriptions. Try cooking at home instead of ordering takeout or eating out. It may not feel like you’re saving a ton right now, but you’ll notice a difference in the long run. (If you need ideas about how to save on things like groceries or utilities, check out some of our other guides.)
If you’re not in the midst of a financial emergency right this second, now is a good time to start stowing cash. While experts recommend setting 3-6 months of living expenses, this simply isn’t doable for everyone. Plus, that can seem like a daunting number! Instead, start small. Maybe you stash your loose change in a piggy bank when you come home from the store. Maybe you hold onto one- and five-dollar bills and let them stack up somewhere safe. Or maybe you transfer a small amount each week to a separate savings account. Any little bit helps, and any kind of cushion is better than nothing at all.
Don’t forget about credit card bills when you’re making budget decisions. You may be forced to make the minimum payments each month, which is okay. Just knowing which credit cards have what balances and interest rates can help with your prioritizing. For example, maybe you won’t have the money on hand to pay a higher amount on each card every month. But you may have extra cash to put toward one card. In this case, you could put that money toward the card with the highest interest rate and pay down that balance. Or, you could put it toward the card with the lowest balance and have one less bill to pay.
In a financial emergency, you may have to pay with a credit card. However, if at all possible, it’s better to pay with cash so you can avoid racking up interest charges down the road. Plus, high balances drive up your credit utilization ratio, which lowers your credit score and could potentially make it harder to get loans or credit cards you need.
If you’re in the middle of a financial emergency right now, this information might not be much help. It might be impossible to pay down your debt AND pay for necessities AND not use your credit card. If you’re at this point, there are still steps you can take. The first is to speak to your credit card company. Have a record of your debt on hand when you explain the situation. Just be polite but persistent. The goal is to get on a modified payment plan with lower, more manageable payments. A credit counselor may also help you develop a plan of action tailored to your needs as well as a strong budget.