Published in: Banks | June 5, 2020
By: Kailey Hagen
Take these steps right now so you can meet your next unexpected expense with more confidence.
Hopefully, this is the only global pandemic we'll face in our lifetimes. And while the impact of the novel coronavirus has been unprecedented, for most of us, it probably won't be the only financial emergency we face. They can take many forms -- a car accident, a bankrupt employer, a tree falling on a house, a loved one who needs around-the-clock care. These situations can all be emotionally taxing and put a serious strain on household finances.
We can't ever predict when these emergencies are going to arise or how much they'll cost, but we can improve our ability to weather any financial storm by taking the following actions right now.
An emergency fund should be your top financial goal every month after you've paid your bills. It's your lifeline that allows you to cover unplanned expenses without taking on debt or going without essentials. Your emergency fund should contain at least three months of living expenses, but it's not a bad idea to save even more. A six-month emergency fund should be able to sustain you even if you're unable to work for some time.
Make a list of all your monthly bills to figure out how much your emergency fund should contain. You can choose whether or not to include extras, like streaming services. Just be aware that if you don't, you may have to give these things up if you find yourself out of work for an extended period.
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Set aside as much as you're able to each month until you reach your emergency fund goal. Keep this money in a savings account so it's close at hand when you need to draw upon it and always rebuild it as soon as possible after you use the money for an emergency.
A health savings account (HSA) is a nice supplement to an emergency fund that can help you cover medical expenses. The money you put in an HSA reduces your taxable income for the year, and if you use the money for medical expenses, you won't pay taxes on it at all. You can also use the money for non-medical expenses, but then you'll pay taxes plus a 20% penalty if you're under the age of 65.
Only those with a high-deductible health insurance plan -- one with a deductible of $1,400 or more for an individual or $2,800 or more for a family -- may open and contribute to an HSA. An individual may put up to $3,550 in an HSA in 2020 and a family may set aside up to $7,100. You can open a new HSA at most banks if you don't already have one.
You should try to save at least enough to cover your health insurance deductible in your HSA. And it doesn't hurt to save more, as you could still have some out-of-pocket medical expenses even after you've met your deductible. For example, your insurance may have a copay or the medical service you're seeking might not be covered under your policy.
Job loss doesn't bring new expenses, but it does make everyday expenses feel a lot more overwhelming, as millions of Americans have found out during the pandemic. You can avoid the same kind of financial strain in the future by having multiple sources of income. That way, you'll still have some money coming in even if you lose one income source.
Not all income streams have to require a lot of work on your part. You could rent out a spare property, if you have one, or sell artwork or courses online. You may have to do some work to get your side business up and running, but once it is, it'll serve as a supplementary source of income. And you'll be able to enjoy the extra cash even while you have a steady job.
When an emergency arises, it's not a bad idea to cut back on spending a little, even if you have an emergency fund or another source of income. Not only will it mean your cash lasts longer, but it will also make it easier to replenish your emergency fund once the crisis has passed.
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Look over your budget and make note of any discretionary expenses you could eliminate in the event of a financial emergency. If you anticipate the emergency costing you a lot of money or lasting for several months, consider switching to this budget to help free up a little more cash.
Emergencies are a part of life, but you can make them a little less stressful by being financially prepared. Use the above tips and check over your emergency plan at least once per year to see if you need to make any changes to it.
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