There's nothing harder to plan for than unexpected events that impact your life and finances. Yet loss of a job, the death of a loved one, illness or other unexpected occurrences happen at one point or another in most of our lives. The key to successfully surviving these life-changing events from a financial perspective is to anticipate hard times. Shore up your financial situation before you are hit with an unexpected expense, so you will be covered in the event something happens.
The Importance of an Emergency Fund
Because we cannot predict when life will throw us an unexpected challenge, it is important for everyone to build and maintain an emergency fund with three to six months' worth of living expenses. The key to building an emergency fund is to set money aside every month, no matter how small the amount.
Financial experts recommend that, unlike retirement funds, emergency savings should be kept fairly liquid, in a savings account or a money market fund. Hopefully you will never need it. But if you do, you'll be glad it's there.
A New Financial Picture
Once the immediate financial matters are taken care of after an unexpected life event, it will be time to take stock of your new financial situation and create a plan for yourself moving forward. Whether you have faced job loss, divorce, illness or another event, you should create a new budget reflecting your situation. This is the first step toward financial security and rebuilding your emergency fund, which you may have tapped into to manage a financial crisis.
To develop a budget, write down your current expenses, indicating whether each expense is a necessity or a luxury. Pulling out recent credit card bills and bank statements can help with this process. Next, estimate your monthly income, including only income that you are certain you will receive. Then compare your income to expenses. If your expenses are higher, you will need to trim your expenses until your income is higher than your expenditures.
You can learn much more about budgeting and utilize our free budgeting worksheet.