Simple Debt-Free Finance

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Avoid Credit Trouble By Having A Plan For Financial Emergencies.

Posted on | January 8, 2009 |

This is a guest post from Trisha Wagner.

One of the leading causes of credit problems for financially responsible people occurs during  or after a financial emergency.  You may pay your bills on time, use your credit wisely and make your mortgage payments, but if you do not plan in advance for a financial emergency you are setting yourself up for a potentially devastating situation.  If you don’t think you need money set aside to deal with unexpected expenses you are deceiving yourself; everyone will face a financial emergency, it is simply a matter of when not if it will happen.  By acknowledging the inevitable you can better prepare to handle surprise expenses in the future.

  • Plan ahead- The fact remains that although we all know we need to save a portion of our income, many people are not doing it. The most common reason for not saving money is -lack of money to save. However in many cases people have simply become too accustomed to spending all of their income (and then some) to realize that making simple adjustments or sacrifices in our usual spending can free up much needed money each month for savings. The first step to prepare for a financial emergency is to start saving money out of each and every paycheck. If your employer offers direct deposit, you can set it up that a certain percentage or amount from each check goes directly into your savings account. If you don’t ever see it, you will likely not miss it.

[EDITOR'S NOTE: I recommend ING Direct Savings - they're free of fees, easy and offer a $25 bonus for opening an account.]

  • Plan for the inevitable- There are some things that people categorize as an “unexpected” expense when in reality it is an inevitable expense. Car repairs, broken furnaces and leaking roofs are just a few of the things that we all know will happen at some point in time. Understand that your home and vehicles will need maintenance and plan for it in advance.
  • Plan for the unexpected- True emergency or unexpected expenses include loss of employment, a death in the family or major medical expenses due to illness. Certainly no one can anticipate these forms or real emergencies, but you can acknowledge they may occur and plan accordingly.

What if you are already experiencing a financial crisis?

  • Increase your income- If you currently find yourself struggling financially you should consider ways to increase your income. This may mean seeking out a part-time or secondary job or looking for a better paying job. There are times when there is no easy answer and you simply have to increase the amount of cash coming into the home.
  • Stop your retirement contributions- It becomes less important to plan for the future if you are not able to get by from day-to-day. While saving for retirement is one of the most important aspects of good financial planning, you must make it through today in order to make it to tomorrow. If you need the money right now and have cut costs where possible, stop your contributions and funnel that money into your current budget. Do not forget to begin contributing as soon as possible after your current financial crisis.
  • Use your home equity (if you have to)- Borrowing against your home can help you out of a tight spot since your home is generally your largest asset. This should be one of your last resorts as you risk losing your home if you are unable to repay the loan.

Things in life tend to happen in cycles.  If you are not experiencing a financial crisis today, that does not mean you will not in the future and vice versa.  People in trouble today do not have to look forward to a lifetime of struggle.  The best way to make it through tough economic times is to plan in advance for emergencies and proceed with caution when strikes.

Trisha Wagner is a freelance writer for DestroyDebt.com, a debt community and debt forum.  Trisha writes regularly on the topics of getting out of debt and personal finance.

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