Benjamin Franklin got it right when he said: “By failing to prepare, you are preparing to fail.”
This especially rings true when it comes to finances. A natural disaster, sudden sickness, even a positive occurrence such as a child getting accepted to college – all these life events can quickly deplete a person’s bank account.
And though many crises are improbable for many people, they are not impossible.
While many parts of the future are unknown, it is always best to be proactive for when the unexpected happens.
Here are three steps you can take now to prepare for what may or may not be coming down the road.
Be honest about your situation.
Start by reviewing where you stand financially. If you haven’t done so in some time, look over your goals, assets, income, expenses and debt, and consider where you may be able to improve.
Often, people put off this important practice because of fear. Ignorance of how much money you do or don’t have can be bliss, but it can also cause undue stress when you’re always worried that your next purchase will result in an overdraft fee.
It may be difficult at first, but facing your finances head-on empowers you to make informed decisions about the future.
Reassess your investments as well as your debt. If your annual percentage rates are higher than you remembered, or if your assets have become burdens, it may be time to make some changes.
You may find the goals you set originally no longer hold importance. If this is the case, make new ones.
You also may discover that your income has increased while your expenses have gone down. If you are lucky to find yourself in this situation, don’t begin spending more just because the money is there. Learn from others you may know who have fallen on financial hardships – all it takes is one unforeseen incident to take you from flush to bust. Instead, get into the habit of putting away a percentage of your paycheck each month into a special “rainy day” account that you can turn to when the weather turns.
This can start with an initial deposit of $1,000 that you add to each month, with a goal to build up a savings of at least three months’ essential expenses. Once you reach that number, set a new target. There is no magic number for what your rainy-day account should total, but ask yourself, “If I lost my job today, how long will my savings last until I find another source of income?” The objective is to have a comfortable sum in the bank to carry you through the storm.
Plan beyond the basics.
For many, the fear of the unknown is what causes anxiety. Talking through the fear and discussing the different options you would have in each situation can provide some peace of mind.
Instead of waiting for the unexpected to happen, challenge yourself to imagine different worst-case scenarios. Get extremely specific with what the situation is, how you arrived there, and what your true reaction would be. Then, devise a budget for how you can survive.
Here are three career-focused scenarios that are not uncommon for many adults to encounter:
What if I lose my job?
What if my spouse loses his/her job?
What if my spouse and I lose our jobs at the same time?
The purpose of picturing yourself in an uncomfortable situation isn’t meant to spark fear; rather, you gain power by facing the “what-ifs” and coming up with a solution before it happens.
Give back if you are able.
One good thing about the unexpected is that it forces people to re-evaluate the areas in which they are investing their time, energies and money. When a crisis hits, those who are outside of the impact zone often will rally their resources to help those who were hit hardest. It is one of the best attributes of the human spirit.
If you find yourself in the position to help others who are struggling, there are multiple ways to get involved.
You can start by reaching out to your local chapter of United Way or American Red Cross to find agencies most in need of assistance. Remember to only give what you can responsibly part with so that you don’t put yourself into a financial setback.
This is where the rainy-day account and worst-case scenario visualizations come into play. These exercises are the financial equivalent of “putting on your oxygen mask first,” because you won’t be able to help others (or yourself) if you’re struggling for breath.
And don’t limit your giving only to money. Oftentimes, charitable organizations need more helping hands to support their mission. Donate your skills and service to a cause you are passionate about, and you’ll find yourself far richer for the experience.
Depending on the organization to which you give, you may qualify for a tax deduction. Ask for a receipt for proof of your donation come tax season.
A word of caution when considering helping family members or friends financially – tread carefully. While it may seem like a compassionate act, things can get complicated real fast if debts go unpaid and emotions get involved.
Go into any conversation knowing what you honestly can afford to give (always make sure your own essentials and emergency fund are taken care of first) and if this will be a loan or a gift. Many experts advise against lending money to family or friends, as doing so can cause tension in the relationship. Instead, consider gifting the one-time sum without expectation of receiving anything in return. Again, take this course only if you have the money available and are stable in your own finances.
When it comes to finances, you can never be overprepared. With a little pre-planning, you can not only survive the unexpected, but thrive through it.