With more than half of Americans living paycheck to paycheck, it's easy to see how scary a sudden financial crisis can be. A sudden job loss or unexpected hospitalization could be financially devastating, and could even leave you homeless within a matter of months. How can you, the "average American," handle a sudden financial crisis? The key to staying above water when a financial disaster hits is to plan ahead, and know your best options.
Plan for emergencies
If your car breaks down, how will you pay to have it fixed? If you miss work, could you also lose your job? These may not be pleasant things to think about, but you need to plan ahead so you'll know how you'll manage if you need money suddenly. The best way to be prepared for a money emergency is to save up for it.
The recommended amount that you should have in savings in case of an emergency is 3-6 months worth of living expenses. When you look at what that actual figure is, it may seem overwhelming, but you don't have to have it all in the bank overnight. If you start small, you can make saving for an emergency easy and painless.
- Set up a direct transfer from your checking account to your savings account, and have money moved every time you get paid. Even if you start with a small amount of money, it will add up if you don't touch it.
- Reduce your expenses, at least temporarily, until you can get a good amount in your savings account. Give up a daily coffee or a bad habit, like smoking, and put the money that you would have spent on these into your savings account instead.
- Sell off things you don't want anymore to fund your emergency savings. You'll boost your financial security and declutter your home, all in one fell swoop.
What to do if you don't have an emergency fund
If a financial crisis hits, and you don't have any money saved up yet, look at what your options are for borrowing money. Some options are more practical than others, depending on how much money you need and how good your credit score is.
- Do you have any friends or family members who could loan you the money you need until you get back on your feet? If you only need a small amount of money, this could be a good option, but beware that borrowing money from people you know can put a strain on the relationship.
- Would your bank offer you a loan to see you through the financial hardship? If your credit is good, and you need a large sum of money, this might be a good option.
- If you have a job, and only need money to see you through to your next payday, consider a payday advance. This short-term loan can get cash in your hands quickly, so you don't have to miss work if you need emergency car repairs or have an unexpected bill that needs to be paid. Remember, it's not just the major disasters, like losing your job or getting sick, that can put your finances in a nosedive. Car repairs, having to replace a major appliance, or a large, unexpected bill could wipe out your paycheck quickly.
Learn good money management skills
Once your financial crisis is past, don't slide back into bad habits. Keep saving money from each paycheck, and create a monthly budget so you know where and how much money you are spending. This will help you avoid overspending, and can help you see if you could be putting more money away in your savings account for future emergencies.
Once you have your emergency fund fully funded, don't stop saving. There will always be the possibility that you'll need to use some of the money, but if that future financial crisis happens, you'll be ready to face it without going into debt to do so.Share