A financial emergency can occur at any time, and it can be difficult to know when you’ll be facing one. Life is packed with unexpected problems, and there are a number of different causes for financial emergencies. An example would be unexpected medical expenses. Maybe you need to pay thousands to bail a family member out of a foreign jail.
What to Do During a Financial Emergency
When such an emergency occurs, you’ll want to sit down, take a breath and carefully analyze the situation. The act of running around your home and panicking won’t help anything.
If you’re trying to get the best possible outcome, then you need to fully understand the situation. The first step is figuring out the exact cause of the emergency.
In some cases, it might be a sudden loss of income. Maybe it’s a mountain of expenses that have been building over time. The cause might even be a natural disaster.
How to Prepare For the Emergency
In a perfect world, this type of problem would never occur. However, financial emergencies are quite common. First, it’s important to create a safety net.
There is really no such thing as a job that is totally secure. One of the best ways to prepare is to keep a safety net of cash in the bank.
The safety net should cover anywhere from three to nine months of living expenses, which includes mortgage payments or rent. There is a strong emphasis on cash because it’s not wise to maintain your lifestyle using credit cards.
Keep Equity Options Open
Another way to get prepared is to take out an equity loan on your home or similar property. Most people don’t like to do this, but an equity loan can provide a substantial amount of money, which can be used to abate a financial emergency.
The good news is that you won’t have to use the loan if you don’t really need to. There are also several tax advantages to using an equity loan during a disaster. In most cases, you can write off the interest on an equity loan of $100,000 or less.
Get The Right Insurance
Depending on the nature of your financial emergency, you can avoid serious financial damage if you have the right insurance.
For example, imagine not having medical insurance and getting into a life-threatening accident. You could owe hundreds of thousands of dollars in medical expenses. If you have insurance, you might only have to pay a fraction of that amount.
The same is true for natural disasters and homeowner’s insurance. It’s important to have insurance that covers all of the major bases. While it’s nearly impossible to predict a financial disaster, you can use these tips to prepare for when it happens.