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Emergencies happen. They can come in the form of natural disasters, such as earthquakes, tornadoes or hurricanes, or a major fire. Many of the emergencies we face are as ordinary and personal as an urgent vehicle repair or an expensive medical procedure. In either case, being financially prepared for an emergency can help you decrease the impact it has on your life and mitigate any long-term financial harm.
Especially in the event of an emergency that displaces you or otherwise has a huge impact on your life, staying financially prepared can be a psychological harbor in a hugely stressful time. Here are four tips for emergency financial preparedness.
1. Assess Your Financial Health
Preparedness for an emergency often comes down to having healthy finances, according to the Federal Emergency Management Agency (FEMA). Namely, your main priority should be ensuring you have adequate income to afford your expenses and set some aside for savings now so you aren't caught completely unaware.
That's because, while you can't predict or prevent an emergency, you can build up financial stability. That, in turn, can make it a bit easier to stay afloat, whatever happens.
Here are a few key moves to make to increase your financial resilience:
- Use a budget. If you're surviving well enough winging it—living paycheck to paycheck with a little leftover for some discretionary spending—you may not see a big problem with your financial situation. But creating a budget can help you manage your money more efficiently and boost your savings. It will show you exactly how much money you have coming in and going out each month, revealing places you may be able to cut back. You can create a budget on your own or use a budgeting app to make it a bit easier.
- Manage debt. If you're carrying high-interest debt, such as credit card balances or personal loans, make a plan for paying it off. You might be able to manage the debt better with a balance transfer card or a debt consolidation loan, which can help you reduce interest charges while you make the highest payments you can afford.
- Increase cash flow. While easier said than done, if you're not able to set aside much money in savings, then seeking additional income can be a prudent move.
2. Create an Emergency Fund
Because life is unpredictable, you need a financial plan for emergencies. Setting aside money for surviving emergencies makes overcoming obstacles of all sizes more manageable. That's why it's important to build an emergency fund.
One rule of thumb is to set aside between three and six months' worth of basic expenses in your emergency fund as a starting point. To fund your savings, direct a portion of each paycheck into the fund until you reach your goal. Choose an amount to save each pay period that's sustainable, meaning it doesn't stretch your budget so far that you struggle, but isn't so low that it makes reaching your goal number feel like a faraway possibility.
Ideally, store your emergency fund in a separate account from a primary checking or savings account. That way you won't be tempted to spend the money on non-emergency purchases. Consider using a secondary savings account, a high-yield savings account or a money market account for your emergency savings.
3. Gather Important Documents
Prepare for a disaster or another emergency by storing all your key documents in a place that's easy to access, such as an in-home safe. You can also store hard copies of essential documents in a safe deposit box, but you'll want to have copies on hand in the event that banks are closed. Securely store digital copies with encryption.
The essential documents that you need to have ready are those that will help you begin the recovery process after a disaster. FEMA lists and groups them into four categories:
- Household identification: These documents prove the identity of everyone in your household and include copies of driver's licenses and other IDs, Social Security cards, marriage licenses and passports or green cards and naturalization documents.
- Financial and legal documentation: These documents help you prove your income and financial responsibilities, which can be necessary for applying for disaster relief. They can also help you prove ownership and regain control of financial accounts if you lose access. Documents in this category include the previous year's tax returns, your lease or mortgage documentation, copies of loan agreements, financial account routing numbers and wills or trusts.
- Medical information: These are documents related to the health and medical care of everyone in your household. Physician and caregiver contacts, insurance cards, Medicaid and Medicare cards, disability documents, lists of medications taken and medical power of attorney documentation all fall under this category.
- Household contacts: While you likely have all this information in your phone, it's prudent to have backups for important contacts in case something were to happen to your address book. Important household contacts include landlord or mortgage representatives, health care providers, social service representatives, lawyers and financial advisors.
4. Invest in Home or Renters Insurance
The most common homeowners insurance claims are due to wind and hail, but claims run the gamut from fire and water damage to theft and medical bills.
Whatever happens, knowing that your home and possessions are covered can help mitigate loss, which can make bad times less devastating.
Depending on where you live, it may make sense to purchase additional coverage for specific hazards. For instance, you might want to purchase flood insurance, which isn't typically covered by homeowners or renters insurance policies.
You can also compare your current homeowners insurance coverage to other coverage from top providers using Gabi®, a part of Experian. Review price and coverage comparisons to find the best policy match.
Build Your Credit Savvy
One key financial preparedness move you should make right now is to mind your credit score. While it's not a substitute for a flush emergency fund, strong credit and low debt can come in handy when you need to borrow.
Always make at least the minimum payments on all debts by their due date to avoid damage to your credit score. In addition, keep credit card balances low and avoid applying for multiple credit products in a short period. These good credit behaviors will help you build or keep a high credit score, and that means easier access to credit at a better rate when you need it.
Assess your current credit health and see where you stand with regular updates by signing up for free credit monitoring through Experian.