Financial emergencies are an unfortunate part of life. No matter how hard we try, it is inevitable that something will blindside us at some juncture in our life. Chances are that it will be many things blindsiding us at many points throughout the tenure of our life. The thing that is important for people to understand is that the way we address these emergencies will determine whether they become catastrophes.
To plan for financial emergencies, I recommend three core steps. These are the things that will allow you to stay calm during the time of crisis and make rational decisions. The purpose of these steps is to ensure that you have what is needed to withstand progressively more intense financial emergencies.
Start a Reserve Fund
The notion of a reserve fund to protect against future emergencies feels mundane to some people. However, the foresight of building capital that can be used to mitigate a financial shock cannot be overstated. Accumulating as little as $1,000 of liquid capital in your bank account can be highly impactful. It provides a critically important cushion against emergencies like an insurance claim or auto repair that could ordinarily drain your financial resources.
This is your first line of defense against financial emergencies and should be one of your top priorities. When you have a reserve fund, you are able to rest easier and invest with more confidence. Being able to absorb financial shocks is critically important to your long-term financial future.
Build a Store of Supplies for Emergencies
Another area of financial importance is to build supplies that will be needed to weather through emergencies. This can range from hard cash at your residence to food in your pantry or backup power for your home. Having a store of supplies is important because it prevents your needing to scramble at the same time as everybody else. When the power goes out, everybody wants to get a generator and find fuel. Unfortunately, by that point, it’s too late.
Emergencies require preparedness. To properly prepare, you need to anticipate what kind of emergencies are likely to come and determine what you will need to take your family past them smoothly. Once this plan has been made, it’s simply a matter of methodically executing your preparations until you are ready to handle whatever difficulties come your way.
Accumulate at Least 3 Months of Capital in Liquid Cash
The last key area of preparation for financial emergencies is to build a stockpile of liquid cash reserves. The main value of this is being able to withstand a major financial shock like the loss of a job or the need to pay a large medical bill. The power that comes from this financial cushion should not be underestimated.
It’s easy to say that holding cash is foolish because its value gets eroded by inflation. However, there is a financial objective that is more important than beating inflation. This objective is survival. Being able to navigate through emergencies is what makes long-term planning viable.
Goal: Begin your preprations to handle financial emergencies today.