It comes when you least expect it, and if you have not planned for it, it will wreak havoc on your finances. Financial emergencies in the form of unexpected car repairs, medical bills, losing a job or family emergencies are some of the curve balls that life throws at us.
Knowing how to protect yourself from these unforeseen moments can help you shoulder the financial blows without getting into debt. Here is what you need to know.
Have an emergency account
An emergency account is beneficial for anyone that is looking to protect them from life's unexpected moments. Start as soon as you can by putting aside an amount that you will be able to maintain monthly and will not place a strain on your finances. Putting aside funds that cover 6-9 months of expenses can create a financial buffer for you. Choose an account or investment that comes with a compound interest rate to make your money earn interest and work for you. Make sure that you have clear guidelines on what constitutes an emergency for you to access this account before depleting funds that you will need later.
Stay insured
Insurance is the umbrella that you may not notice the benefits of until it rains. Not being insured can leave you financially exposed should the unexpected happen. Having insurance in the form of car, house, life and disability can protect you and your loved ones. Start with the basics of life insurance and funeral cover and gradually build towards having an insurance portfolio that will protect you.
Reduce debt
There is good debt that can help you accumulate assets that grow in value and build your financial portfolio and there is bad debt that can end up costing more than what you expected. Understanding the impact of interest rates on debt is vital. It will help you see a clearer picture of how taking on more debt can affect you financially, especially in a situation where you may have lost a job.
Track your finances
Always keep track of your finances through a budget and going through your bank statement. Doing this will give you a realistic picture of where you need to cut back and what could be causing you to bleed financially. Having a fallback budget created for when things do not go as planned can be beneficial in a time where everything feels like it is spiralling out of control. When it comes to a fallback budget, look at things that you could cut back on to reduce expenses to keep you going.
Protect your means of earning an income
One of the most crucial things when it comes to creating an emergency account is protecting your means of earning an income. Not having a source of income can affect all the points we have mentioned. But how do you do this? Having a second stream of income can be useful, especially in a time when job security is uncertain. You can also invest in things such as income protection to help you maintain a steady stream of income when you need it the most.