Financial emergencies can strike at any moment. Everyone hopes to avoid them, but they happen, and crises can leave you in a dire situation if you can't come up with some quick cash to solve a short-term problem.
While major risks such as the death of a family member or a devastating home fire can be mitigated by insurance, smaller risks can also have devastating consequences -- especially when they have the potential to push people over the financial edge.
Such situations -- whether it's a doctor's visit that you need to pay out of pocket or a car repair that must be done so you can get to work -- can have adverse effects on your health, your family, and even your employment situation if you are unable to scrape together a few dollars.
Studies have asked people if they could come up with $2,000 in 30 days in case disaster strikes. According to information provided by the Bipartisan Policy Center and a study conducted by the National Bureau of Economic Research, the results were sobering:
Roughly 44 percent of Americans say they are not prepared to meet emergency expenses. When asked if they could come up with $2,000 in 30 days, one-quarter of the people surveyed said that they were certain that they could not. An additional 19 percent responded that they would be forced to sell possessions, such as cars, furniture, or their homes, to do so.
This finding illustrates the urgent need for financial discipline in American households.
Nineteen percent of survey participants said they would need to sell possessions or rely on payday loans in order to meet an unexpected expense. Payday loans are particularly toxic and might even push you into a debt spiral.
Way too many Americans are living on a fiscal cliff. Planning for an emergency, therefore, is absolutely vital, and having at least a small financial cushion to fall back on is paramount in order to be able to withstand adversity.
Following these three critical steps will help you to get a grip on your financial situation and save for a critical emergency fund.
1. Earn more, spend less
You have two choices when it comes to tackling your financial situation: increase your income (which might be a tad harder to do in a challenging job market) and/or decrease your spending.
Many people don't seem to have a real handle on how much they are spending, and on what. This is where budgeting can help you gain clarity about your expenses. Track your income and expenses vigorously to see where your cash goes every month and you will quickly find new ideas on how to put a few dollars toward a savings reserve.
2. Be creative
When it comes to cutting expenses, you must be creative. Many expenses can be cut down or eliminated altogether if you just question their necessity.
Do you really need a car to get to work, or can you share a ride with a colleague? Do you have magazine subscriptions that you can cut back on? Are you spending money unnecessarily on cell phone bills or coffee shops?
Unnecessary items are the first and easiest to cut. Be creative and challenge your current approach to spending money.
3. Avoid debt at all costs
Easy credit and debt dependency are often the roots of financial problems that can drag on for years. Credit card companies benefit when you are in debt, have to roll over credit card balances, and miss payments.
Unless you want to set yourself up for a lifetime of debt servitude, stay away from toxic consumer debt and be responsible for any debt you take on (avoid carrying credit card balances, for example).
The Foolish takeaway
The statistics above have made clear that Americans are ill-prepared to come up with funds to deal with an emergency situation.
This makes it fundamentally important that you get a grip on your financial situation and start saving as soon as possible. Control your income and expenses, start budgeting, and find creative ways to cut down on unnecessary expenses.
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