Emergencies are usually unexpected and unpleasant, but when you are suddenly thrown into the deep end of a crisis without any warning, knowing what to do first can save you precious time and prevent things from getting out of control in a blink of an eye. Here are a four devastating (but all-too familiar) financial emergencies many people encounter on a regular basis. (You don't need a degree to understand your money, begin saving and pay down debt. To learn more, see Top 5 Budgeting Questions Answered.)
IN PICTURES: Digging Out Of Debt In 8 Steps
- Unexpected Expenses
You've been doing so well clearing your debt, but out of the blue your car decides to die, which causes you to max out your almost-paid-off credit card, leaving you no better off than when you first started.
Prescription: Start an Emergency Fund Savings Kit. Cut yourself off from relying on your lines of credit to bail you out, and start setting aside cash each month, until you have a minimum of no less than $1,000.
Setting aside $50-100 a month is a small enough amount that you won't miss in your debt repayments, but at the end of 12 months, you'll have $600-1,200 saved, and will be financially prepared for any unexpected expenses. Ideally, you should have three to six months of living expenses saved, just in case you have a run of bad luck.
- Lost Job
You have been laid off or your hours have been cut back, and you're not going to make your essential bills each month, which include a mortgage/rent, food, utilities, debt and fixed lease payments.
Prescription: Pick up another job immediately to stop your bank account from bleeding out too quickly. This is not a simple question of just having to scale back in your expenses - if you don't have any income, you can't pay a dime in expenses without dipping into your savings or lines of credit. A minimum wage job at $7.25/hour should do the trick by applying a gross income of $14,500 or $1,208.33 per month to your bank account.
Additionally, cut back on non-essential services to try and match your new budget as closely as possible. This will help keep you from blacking out into the red. It may not solve your budget or job situation entirely, but it's better to be only $500 in debt each month than $1,000.
- Credit Card Overdose
You've maxed out your credit cards and have been cut off financially. Now you're living paycheck to paycheck but unable to make it through the month before the money runs out.
Prescription: Go cold turkey on your credit cards. Use cash exclusively; put your cards on ice (literally!) or cut them up. Then start tracking your daily expenses to understand where the money is really going each month. Next, dig out your paystubs and calculate how much you make (net) per month, and make a quick budget based on the following percentages ($1,000 net income per month).
- Housing - $350 (35%)
- Transportation - $150 (15%)
- Food, Entertainment, Personal Care - $250 (25%)
- Savings - $100 (10%)
- Debt - $150 (15%)
- The total should add up to 100% or equal to your total net income. If you pay slightly more in rent, reduce the budget accordingly in the other categories. Start an emergency fund out of your 10% of savings and start kicking your credit card habit by putting as much as you can (at a minimum dosage of 15% of your net income) towards your debt to start your financial rehabilitation. It won't be easy, but it is possible.
- Life-Changing Event
You're in a middle of a stormy divorce, but are starting to drown in financial legalese without a clue of how to make sure you are protecting your assets properly.
Prescription: Perform some emergency CPR to breathe some life back into your finances. Assess the danger and check to see if you're floating towards the financial deep end by pulling your credit score to assess your credit worthiness to lenders.
Next, assess the size of your financial life jacket by listing your assets and debts. List all of the assets owned in bank, credit and trading accounts, both jointly and individually. If there are any jointly owned accounts, take a screenshot of the account online with the date and time stamp so you have visual proof of what was in the accounts as of the day you checked.
Now, begin proceedings to close any joint accounts and move your share into your new individual accounts. For health insurance, property or retirement, follow the same procedure to close all of your bank accounts, and don't forget to also change your beneficiaries.
Finally, create a budget based on your net income to stay afloat until the storm clears, if you haven't already done so. Getting your life back on track won't be easy, but when the clouds break, you'll feel like a new person starting with a clean slate.
IN PICTURES: 9 Ways To Trim The Fat From Your Spending
The Bottom Line
No one has a crystal ball to see into the future or expects to get divorced or fired, but we have to plan ahead for those possible emergencies and save for life's proverbial rainy days. True financial preparedness is all about playing good defense, and should be more proactive than reactive, because you never know what might be right around the corner.
For the latest financial news, check out Water Cooler Finance: The Post-Stimulus Slump.
BudgetingMoving doesn't have to be as expensive as you think. Here are some great ways to save money on moving costs.
BudgetingConvenience is a luxury. However, any cost-conscious individual should be aware of these ridiculous ways we pay for convenience and how to avoid them.
Credit & LoansUnderstand the difference between an average credit card and an elite credit card for the wealthy. Learn about the top five credit cards for the super rich.
BudgetingDon't let your baby's wardrobe derail your budget. These top tips help you to save money and spend wisely on baby clothes.
Personal FinanceFinancial trends among college students are a cause for concern, prompting a renewed emphasis on financial literacy.
Credit & LoansAn equated monthly installment is a fixed payment a borrower makes to a lender on the same date of each month.
BudgetingThe excitement of welcoming your first child to your family shouldn't prevent you from making good cost-effective decisions.
BudgetingDating on a budget doesn't have to be boring. Try these 5 tips to find the best dates on a budget.
BudgetingBuying secondhand items is a great way to save money, but these seven kids items should not be bought used.
InvestingFrom platforms for saving money to those that account for side jobs, mobile apps are changing spending habits and income generation in urban areas.
Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
A wide range of possible deductibles are available with health insurance plans, starting as low as a few hundred dollars ... Read Full Answer >>
While there is no hard rule for how much of a person's income should be discretionary, Inc. magazine points out that it would ... Read Full Answer >>
Generally speaking, aim to keep between two months and six months worth of your fixed expenses in your demand deposit accounts. ... Read Full Answer >>
Depending on the need, an individual or business may take out a form of credit that is either open- or closed-ended. While ... Read Full Answer >>
Bankruptcies can be devastating to your credit score. Even worse, a bankruptcy will be listed on your credit report for between ... Read Full Answer >>