The pandemic and its economic effects have hit hard. Now that we are cautiously in what might be considered a slow, slow rebound, individuals and families may be wondering how to better prepare financially for the unexpected.
There’s only so much you can do to prepare for what may or may not happen. And truthfully, it’s hard to imagine how any of us could have prepared for the full extent of COVID-19 and all it has entailed because it is such an unprecedented event.
But there are a few financial principles to keep in mind when life and finances are stable and going well in order to help better financially prepare for the unexpected.
Establish financial goals and work toward them
A solid way to alleviate fear of the uncertain is to have a plan. If you don’t already have a financial plan in place, consider outlining one for yourself if you’re single, or with your spouse if you’re married.
While things are stable and going well, what financial goals do you want to pursue? Being debt-free? Paying off your house or saving to buy a house? Investing a portion of your income? Saving for your kids’ college?
Part of establishing solid financial goals is having a budget and working toward paying off debts, which we’ll discuss below. But approach finances with a clear plan of where you are now, and where you want to be. You’ll have more confidence to adjust to changes and uncertainties when they arise if you’re grounded in your financial realities right now.
Have a budget and know your numbers
To prepare financially for the unexpected, create a budget and stick to it. Budgets may get a bad rap for being no fun or too rigid. But really, a budget can be a safety net, a guide, and a barometer all at once.
If you clearly outline what you’ll spend money on each month with the income you have to work with, you don’t have to worry about coming up short when the unexpected happens. In this way, a budget can act as a safety device to prevent you from spending your money as soon it deposits into your account. It can also guide you if the unexpected does happen and you need to make changes or adjustments to what you’re spending every month.
And a budget can serve as a barometer on your spending habits — if you’re spending more and more on eating out every month and that doesn’t fit into the plan you’ve outlined to reach your goals, you know there are changes to be made next month.
Work to become debt-free
Ridding yourself of all consumer debt (credit cards, car loans, student loans, etc.) will not only give you freedom to go after your financial goals, but it can also make dealing with the unexpected much easier. If incomes shift, if budgets get tight — or worse, you lose one income altogether — being debt-free means you’ll have fewer or even zero payments to make on debt every month.
There are many ways to work toward paying off debt, such as the debt snowball or by paying off high-interest loans first. But making this a goal you pursue with vigor during the stable and secure times will give you that much more freedom and flexibility when the unexpected does hit your finances.
Make saving a priority
And of course, the absolute best way to feel secure when the unexpected happens is to have a robust emergency savings fund. This is not the same as saving for a home, a car, or college education. This tip refers to creating a savings fund that is reserved only for emergencies.
Dave Ramsey often says that an emergency fund makes a crisis an inconvenience. And it makes sense: if you have a savings fund with enough money to cover three to six months of expenses, then a surprise medical bill or an unexpected but dire home repair will be an inconvenience, not a financial crisis.
And even more relevant to living in a time of pandemic, having a solid savings fund can help you bridge the gap during times when your income may be reduced, paused, or lost altogether. It can give you security as you work to replace that income.
Some financial experts recommend paying off all of your debt before saving aggressively, because it can be hard to accomplish two major financial goals at once and make any notable progress. But the important thing is to decide on an amount you’d like to have in an emergency savings fund, and then build up to that number to give yourself a cushion for the unexpected.
This may be a flat number you decide on, or you may want to calculate a few months of expenses and the amount you’d need to cover those in order to come up with a goal for your emergency savings fund. And remember, this is only for emergencies — it’s up to you or you and your spouse to determine what constitutes an emergency.
Prepare now for financial stability in the future
A budget, becoming debt-free, and a robust emergency savings fund can all help you approach the uncertain with peace of mind in your financial situation. When sailing is smooth, work toward financial goals that will set you up for success and security when the water gets rough.