Emergency loans are flexible and offer fast funding times. But they also come with high fees and can impact your credit score if you miss payments.
The best way to avoid going into debt during an emergency is to set up a savings plan ahead of time. Here are a few ways to start.
1. Build a Rainy-Day Fund
The biggest thing you can do to prepare for unexpected expenses is to build a rainy-day fund. The recommended amount varies, but it’s typically around $700-$2,500. This will vary based on your lifestyle, so make sure to do an assessment of what could go wrong in your life and how much it would cost to fix it.
There are many ways to save for a rainy day, including using a budgeting strategy that directs 20% of your monthly income toward savings. Other strategies that can help include cutting back on unnecessary spending, such as canceling subscriptions to services you don’t use or comparing prices for items you need before buying them. Saving for a rainy day also includes taking advantage of windfalls, such as bonuses, cash gifts, or tax refunds.
Once you have a savings plan in place, it’s important to stick with it. This will help you get in the habit of saving and can prevent you from reverting to old spending habits when it comes time to pay for an emergency expense.
It’s also a good idea to keep your rainy-day fund in an easily accessible location, like a high-yield savings account. These accounts earn a higher interest rate than traditional bank savings accounts and offer the flexibility of withdrawing funds at any time. You can also compare rates and features of different savings accounts to find the best fit for you.
Lastly, if you’re able to save an extra little bit each month, it can make a big difference when you need it the most. Consider taking on a side gig or putting in a few extra hours at work to give your savings a boost. This can also help you reach your goal of building a rainy-day fund faster and develop the discipline needed to save.
Saving money and curbing extra costs might not be the most fun financial activity, but it’s one of the best things you can do for your long-term financial health. The peace of mind you’ll gain from having a rainy-day fund in place can be just as rewarding as the financial security it offers when you need it the most.
2. Keep a Stockpile of Emergency Supplies
Regardless of whether you have an emergency savings account, credit card with an introductory low-interest rate, or personal loan, you should always be ready for unexpected expenses. Consider implementing strategies like canceling recurring subscriptions and services you don’t need, using coupons and shopping at thrift stores to find good deals, or participating in a local group that collects goods for repurposing and redistribution.
Creating an emergency food supply is a critical step in family preparedness that will provide comfort in the event of a natural disaster or other crisis. An emergency supply kit can include food, water, a first aid kit, and tools. Adding a sleeping bag or blanket and a flashlight will make the kits even more useful in case of an extended power outage.
Start by gathering staple foods your family will eat and storing them in air-tight plastic containers or glass jars with tight-fitting lids. Include index cards with cooking directions or recipe mix ratios and label each container of food as emergency or disaster foods. Add zipper-closure plastic food storage bags to your emergency supplies so you can store opened packages of rice, instant cereals, potatoes, and dry milk for later use.
A two-week emergency food supply will provide adequate nutrition for most people in the event of a crisis that interrupts grocery store deliveries or other normal services. You can build this stockpile from foods you already keep in your home by adding more canned or nonperishable items. It is a good idea to rotate the foods in your emergency food supply periodically, applying the first-in, first-out rule.
The American Red Cross recommends a three-day supply of nonperishable food and water. This emergency food supply should contain the basics, including protein (such as beans), carbohydrates, and fruits and vegetables. It should also contain drinking water and cleaning supplies.
If you need additional cash to pay for an urgent expense, emergency loans may be available from online lenders or your local credit union. It is important to review the terms of an emergency personal loan before deciding to borrow. Some lenders will inflate interest rates or charge other fees that can make the debt more expensive than it should be.
3. Prepare for a Job Loss
If you’re working during this turbulent time in our country, it’s understandable to feel on edge about your job. Rumors about layoffs are circulating, and if you live in an area that’s been hit hard by the pandemic, it may not be unreasonable to worry that you could lose your job too. Luckily, there are some money moves you can make ahead of time to soften the blow of a potential job loss.
Start by paying down your debt and building an emergency savings fund. Experts recommend having three to six months’ worth of expenses saved in case you have to get by without a salary for a while.
You can also put some of the federal government’s $1,200 checks (or any tax refund or stimulus check you get) into savings to help jump-start this savings account. It’s also a good idea to use up all of your annual Flexible Spending Account funds before losing your job, as they won’t be available once you stop working. If you can afford to do it, add riders to your life and disability insurance policies that waive premiums if you’re out of work for an extended period.
After you have a decent amount of money set aside, make a budget for yourself and start looking for quick ways to cut your spending. If possible, try to reduce or eliminate any unnecessary costs, such as cable or streaming services, eating out less often, and using sites like Truebill to find subscriptions you no longer need. You can even raise your car and home insurance deductibles to save on monthly payments.
If you’re worried about your job security, it’s also a good idea to contact your state Department of Employment Security and ask about their unemployment program. Most states offer some form of assistance that can pay your bills while you search for a new one, but these benefits aren’t designed to replace your wages, and most only last about six months. By following these steps, you can take some of the stress out of a potential job loss and get your finances ready for the next stage of your life.
4. Create a Family Emergency Plan
It’s a good idea to develop an emergency plan for your family. As you do this, take into account the natural disaster risks that are unique to your location and the needs of specific members of your household (such as infants, seniors, or those with medical conditions). It is also important to familiarize yourself with response plans at your workplace, children’s school or daycare, and other places where your family spends time.
Your family emergency plan should include two meeting locations where your family will gather after a disaster or an evacuation, and it should be outside of your immediate neighborhood in case roads are closed, or the area is evacuated during an event. Make sure to include the needs of any family pets in your plan as well. Also, choose an out-of-state family member or friend to serve as your emergency contact. Have them provide their name and phone number to each family member and place it in their cellular phones as an emergency contact. Keep this information updated and available at all times.
Practice your plan with your family at least twice a year to ensure everyone understands their role and how the plan will work in an emergency. Set up a shelter-in-place or evacuation drill, and check that your emergency supplies are ready to go. Make a list of things to do during an emergency, such as shutting off utilities, and post it near each telephone.
Consider subscribing to alert services that will send you instant emergency messages in the event of bad weather or other local events. This will save you the time and effort of searching for your cell phone or radio in an emergency.
The old saying, “Expect the unexpected,” is true for both financial emergencies and disasters. Planning ahead can help you minimize damage and protect your assets, and having a backup plan like an emergency loan can help get you through the toughest of times. By taking steps to prepare in advance, you can avoid the stress of dealing with unexpected expenses and focus on getting back on track.