How to Prepare for Life’s Financial Emergencies

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Q: Some of us almost lost our homes to a flash flood. A nearby stream overflowed and luckily the neighbors were able to help with sandbags and we were able to save our houses. However, it made us think about what could have happened and what we would have done if our house had actually been damaged or if we had lost it completely. It seems that we face more natural disasters every year and that we have to do everything we can to take care of ourselves as much as possible. Where do we start financially when it comes to planning how to handle an emergency? ~ Janelle

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TO: This year has seen its fair share of emergencies, with the fires and floods in British Columbia even making international headlines. Serious emergencies that affect people in many regions receive the most attention, but a crisis can present itself in many different ways and with varying degrees of severity, each of which can have a significant impact on our finances. While it is not possible to plan for all emergencies that we may face in life, we can make our finances disaster-proof to relieve some stress when faced with a disorder.

The trick to managing the unexpected is in preparation. Just like kids in school practice fire and earthquake drills, we also need to practice what to do financially if disaster strikes. The best way to do this is to incorporate emergency preparedness measures into our daily money management habits. Here are some ways to do it:

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Protect essential documents

Being organized with our affairs is important to be on top of our money management. Consider how you organize your financial, health-related, insurance, and other personal documents, including your ever-growing list of passwords. If most of your affairs depend on a paper-based organizing system, think about how to keep your paperwork safe and accessible in an emergency.

Depending on the nature of an emergency, digital files of essential photos and documents may be more accessible if stored and / or backed up in a cloud-based system. For documents that cannot be stored electronically only, for example passports, identity cards or a will, gather them all in one place. That way, you always know exactly where everyone is. Even if copies of documents cannot be used, scanning them for electronic storage is still an easy way to keep information close at hand in case they become damaged and need to be replaced. You can even decide to store them in a plastic or fire retardant container for added security against water or fire damage.

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Make sure you have cash on hand

Depending on the situation, an emergency can be a one-time incident or take place over a long period of time. When considering the types of emergencies to prepare for, natural disasters may come to mind first. However, job loss or a family illness can be as much an emergency as a flood or fire. The underlying similarity to all of these situations is that you need money on hand to make ends meet at times that challenge your finances.

To prepare for that time, take steps to bring your expenses below your income level on an ongoing basis. Spend less than you earn on your monthly bills and weekly expenses. Set aside savings in an emergency fund so that you have a rainy day reserve fund to help you during at least the first few weeks of an emergency. During a natural disaster, electronic payment methods may not be available. Easily accessible cash is also critical. Relying on access to credit could leave you short, especially if you are already close to the limits of your line of credit and credit cards.

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Pay off debt to keep credit accessible

Once we are faced with a crisis, it is generally too late to secure access to new credit. We may no longer have a steady job, earn less than before, or no longer have any disposable income.

Make it a practice to pay off what you owe, and if you’re currently in debt, work to pay off what you owe as quickly as possible. If you have a home equity line of credit (HELOC), use it sparingly and only for pre-planned purchases. Avoid using it to pay off your credit cards each month without a plan on how to pay off the credit line at that time.

For some, having cash on hand in an emergency could mean having access to low-cost credit options. Due to its low interest rate, a line of credit can be a lifesaver when a crisis hits, but it shouldn’t be your only source of funds. Practice healthy HELOC habits on an ongoing basis so you have access to your available credit when you need it most.

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Take steps to stay in control

One of the hardest parts of dealing with a crisis is managing the unknown. Emergencies happen when we least expect them and often unfold unexpectedly. However, one of the best ways to find calm in a storm is to focus on what you can control, rather than what is beyond your control.

Review each of your insurance policies every time they are renewed. If you are not sure what you need coverage for or how much coverage you need, contact an insurance professional for information. They can also help ensure that the policies you have meet your current needs and that changes to the policy wording or the coverages themselves do not hamper the perils you need to insure against.

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Keep your filed taxes current so you can benefit from income-proof government support initiatives, both on an ongoing basis, but especially as you recover from any widespread crisis. While the government generally does not withhold benefits during an emergency, as we saw during the pandemic, there are times when overpayments are paid back. These large government debts can pose additional difficulties and make it difficult to manage your budget.

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Drafting of a emergency budget it’s another way to stay in control of your financial situation. Determine which expenses are the most essential and the minimum amount of money you need to cover them. Next, determine the source of those funds. If the money will come from savings, find ways to increase your income in small ways so that you can save what you need in the shortest time possible.

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The bottom line to protect your finances from disasters

Don’t be afraid to ask for help, both in a crisis and now, if you need help preparing for your disaster-proof finances. Qualified professionals and trusted friends or family can help you improve your situation. When faced with a crisis, the last thing you want to do is take on more debt. Depending on the duration and severity of the crisis, the additional debt could be the factor hampering your ability to recover. While an emergency can upset or even nullify previous plans, learning how to manage money successfully before the crisis will help you regain your financial balance as quickly as possible.

Related reading:

Financial crises just happen, can we even prepare?

More tips on how to survive a financial emergency

How to plan for unexpected expenses

Scott Hannah is president of the Credit Counseling Society, a nonprofit organization. For more information on managing your money or debt, contact Scott at E-mail , check nomoredebts.org or call 1-888-527-8999.

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