Life in itself is all about change. Some changes that happen in your personal life are planned and embraced, whereas some that are not planned leave you with mixed feelings. A leak in the roof due to incessant rains can delay you to office. A health hazard can derail your financial planning goals. You cannot be fully prepared for a financial emergency, but there are precautions that you can take to be better prepared for unexpected events. It is critical that you know what to do during a personal finance emergency and also what steps not to take in case of a financial disaster. Errors you make when you are most vulnerable can have a snowballing effect down the years. Smart decision making at the time of crisis can clear up your finances, give you some breathing space and launch you towards financial freedom again. Before an unfortunate event crops up, arm yourself with knowledge that can help you combat any personal finance emergency.
Not all financial decisions that you make have to be negative, a repeatedly problem giving car needs to be replaced to prevent you from spending too much over repairs each week. If you have a long weekend approaching, friends or colleagues will make a plan for an out station outing which again is a sudden expense but not a negative one. Even if you are a careful planner and have kept a budget in case of a financial emergency, you still need to assess your current plan post the emergency and make changes to it. Coming back to the example of the leaking roof, it would not be an emergency if you were proactive and did a pre-monsoon check.
Why you need to be prepared for a financial emergency?
Financial emergency can occur without warning. Due to some unavoidable circumstance if you end up losing your job, the loss of income will affect your savings, and that in turn will prevent you from tackling a financial emergency. We normally avoid thinking of deaths or prolonged ailments; although it is part of life. We would never think of this happening to our loved ones but that is reality.
A natural disaster such as an earthquake or fire caused by an electrical short circuit can lead to serious damage to your home or workplace. The financial emergencies that occur due to natural causes cannot be avoided but can be covered using an emergency fund. A credit card debt or loan EMI defaults can also be considered as a financial emergency. If you are not prompt with your bill payments, you will then have to tap onto your savings to pay for the pending payments and their respective penalties.
A financial emergency is sudden but you cannot gauge how expensive it can be. The sudden expense could fall between Rs.10,000-25,000 or between Rs. 75,000-100,000. You can have a good financial emergency management plan but how much funds you need to set aside is not easily identified. A solution for that is to continue saving as best as you can. Not setting a finite number to the amount you save but doing your best.
Make use of passive income to build your wealth over a period of time. Passive income could be investment at a digital lending platform or receiving rent or interest earned on savings account balance or recurring deposits. Sometimes you will receive a raise in salary or maybe win a lottery. You may be a painter during leisure time and sell your paintings online. This extra income can be diverted to an emergency fund to battle sudden financial emergencies. A passive income will add to your primary income and accelerate the clearance of any financial emergency.
What are the effects of financial emergency?
- Financial emergency can lead to anxiety over what you should do next.
- You may end up spending more than your credit card limit and invite credit card debt
- You may have to give up on a few plans to make up for the expense towards an emergency
- You may end up making wrong decisions which could make you spend more in the future.
How can you be prepared for a financial emergency?
1. Create an emergency fund
This is the best solution to counter a financial emergency. If you have set funds separately for an emergency you are less stressed, optimistic and financially at ease as your monthly budget is unaffected.
2. Prioritize your spending
Making a plan to prioritize your spending can be key to handling your emergencies. Ensure you are spending on necessary things like food, shelter, commuting, utilities, bill payments etc. Cut down on excessive trips to the restaurant or movie screenings. Focus on the emergency fund at all times. Replace an expensive vacation destination with a more pocket friendly one.
3. Set up a backup budget
There is no need to panic during times of financial emergency if you have a budget set in place. You can assure yourself that the budget will be able to make up for the absence of an emergency fund. Start slowly with the budget. Increase the amount for the budget as and when your income improves.
4. Make use of credit
A quick loan from a digital lending platform can easily solve your financial emergency issue. Online platforms provide personal loans for medical emergencies, travel, wedding etc. You can make use of your credit card by increasing the credit limit. Although credit is a good option, you should be prudent to make the loan EMI payments on time.