As we go through life inevitably we'll come upon financial challenges. Whether it's a health crisis, paying for large student loans, dealing with a job loss or coping with the loss of a loved one, we will all go through challenges at one time or another.
While dealing with those challenges may not be pleasant, and we can't always avoid financial challenges altogether, there are things that we can do in order to plan ahead and cushion the blow when those challenges arrive.
Today I thought I would look at a few ways that you can plan ahead and protect yourself for any number of financial challenges that come your way.
Planning For The Worst (Hoping For The Best)
Expect the best, plan for the worst, and prepare to be surprised. – Denis Waitley
If there's one thing I've learned in life, it's that the unexpected seems to happen pretty often (so why is it so unexpected?). One day you can be living life, having fun with family and friends, and the next you can be laid up in a hospital bed clinging to life.
Financial challenges are around every corner, so it's important to plan ahead, minimize as much risk as possible and prepare for the known and unknown challenges where you can.
So what does that type of preparation look like? It means saving up an emergency fund, getting rid of debt, getting important types of insurance, and making sure you do what you can to stay in good health. So let's look at some important areas that everyone should be planning in.
Saving Up An Emergency Fund
When planning ahead for life's financial challenges, one thing I believe most people should have is an emergency fund. The problem? Over 60 percent of people didn't have enough to cover even a modest unplanned expense:
Just 38 percent of Americans said they could cover an unexpected emergency room visit or even a $500 car repair with cash on hand in a checking or savings account, according to Bankrate… About 26 percent would reduce spending on other things, and 28 percent said they would either borrow from family or friends or use credit cards.
If you don't have enough to cover even a $500 car repair in your savings account, you're going to be paying interest on that credit card, sooner rather than later. In fact, Money magazine says that 78% of us will have a major negative event happen in any given 10-year period of time. So unplanned events will happen, so why not plan ahead!
How Much Should You Save?
So how much should you be saving in your emergency fund? It depends on who you ask, and what your current situation is.
If you're in debt some like Dave Ramsey suggest having a smaller $1000 emergency fund, with the rest of your excess income going towards paying off debt. When we were getting out of debt we opted for a little bit more, $2000, based on a history of ongoing health issues.
Once out of debt experts suggest having anywhere from 3 to 12 months worth of expenses saved. Dave Ramsey says somewhere between 3-6 months, while Suze Orman proposes 8 months. Other experts recommend similar amounts. At our house we're even more risk averse and we're aiming for 8-12 months of expenses saved. It all depends on how many obligations you have for regular recurring expenses like food, clothing, housing, transportation and other essentials.
Some questions you might want to consider when deciding how much to save in your emergency fund:
- How much debt do you have?
- How stable is your job?
- Do you own your home?
- Do you have kids?
- Do you have health issues?
- Are you covered by insurance, and how good is it?
- Do you have large expected expenses coming up that need to be saved for?
Using Insurance To Mitigate & Transfer Risk
Another important part to planning ahead for financial challenges is to protect yourself for any challenge that has the potential to bankrupt you.
For example, if a major medical event has the distinct possibility of being too expensive to pay for, get insurance to cover the worst case scenario. If your spouse would have a hard time getting by if you were to die unexpectedly, get life insurance to cover the gap. If a house fire would mean not being able to build a new home and pay cash, get homeowner's insurance. Transfer risk from yourself to the insurance company. The cost is often worth it.
Some major types of insurance that you should consider having:
- health insurance
- life insurance
- homeowner’s insurance
- auto insurance
- disability insurance
- long term care insurance
Thinking about having these types of insurance can feel like a luxury at times, right up until you need them.
My wife had an unexpected blood clot that almost took her life several years ago. If we hadn't had good health insurance the $250,000 in medical bills would likely have bankrupted us.
A coworker and his family had their house burn down last week (see the smoke in the picture to the right – he lives near me). While it is a traumatic event, having homeowner's insurance means it will be slightly less so.
One large family with 7 kids lost their father in a head-on collision with a deer. Life insurance would be key in this situation.
Don't wait until it's too late, get covered for the worst case scenario before you need it. Check out our insurance quotes page here.
Having A Budget In Place For When You Need It
Having a budget is like having a financial battle plan to help guide you along the way when the going gets rough. When you have a budget you know:
- What's coming in: Knowing what resources you have available (and if you need to find more) is an important first step.
- What's going out: If your money tends to disappear from the account every month without you knowing where it is going, figuring out your expenses is key to reigning spending in.
- What's left over: Knowing what kind of margin for error you have, and what's left over in order to save is important starting point to know how much you can save and invest.
If you already have a budget in place when financial challenges appear, you'll be better able to navigate choppy seas. You won't have to scramble to figure out where the money is disappearing to, and why your savings isn't as big as it could be. You'll know where your money is, and where it's going. You will have already given each and every dollar a job and a name.
When each dollar is accounted for, it's much easier to stay above water when challenges appear.
At our house we use You Need A Budget software for tracking our family's income, expenses and savings. It has been invaluable to helping us stay on top of our finances.
Know Your Family's Special Financial Challenges
If your family has special challenges that are more likely to become an issue, it's important to plan for those eventualities especially.
For our family, since my wife has some ongoing health issues, that means we paid careful attention to our health insurance and health care needs.
My wife had a major blood clot in her leg several years ago, to the point where the doctors thought she might lose her leg. After a month long stay in the hospital and several surgeries, my wife recovered and was able to come home.
The cost for her month in the hospital? Over $250,000! Thankfully we had good insurance and we didn't end up paying much more than $2000 or so.
These days we plan very carefully for our health care expenses.
- We pay for the best health insurance coverage available through my employer. According to the NCHC, over a third of the uninsured have problems paying medical bills. Now that health insurance is required (or you pay a fee), there may be fewer insured, but knowing what kind of coverage you're getting is still key.
- We save up the maximum contribution throughout the year for health care expenses in our Health Savings Account (HSA) to get tax free health care spending.
- We keep close tabs on our individual and family deductibles and co-insurance amounts, and plan our health care accordingly. (For example, last year we went over the deductible in March, so we planned needed checkups and procedures for later that year since they were 100% covered after our deductible. )
- We check to see if there are more affordable or alternative health insurance options available.
Your family's special financial challenges may be different from ours, but it's still a good idea to identify what your family's unique needs are, figure out the financial pressures that may be involved, and plan ahead for them where you can.
Give Yourself A Safety Net, Transfer Risk And Plan Ahead
Planning for financial challenges and major life changes isn't always easy to do. Often, we just don't know when a trial is imminent.
The best that we can do is to give ourselves some margin for error by setting up an emergency fund that can cover our normal expenses for a good period of time while we recover.
In addition, it's important to transfer risk for larger challenges from ourselves to the insurance companies. For example, why take the risk of not being able to replace your house if it burns down when you can just buy homeowner's insurance for a few hundred dollars a year?
Finally, making sure that your finances are in order by keeping a family budget is a good way to make sure that things don't fall apart when the going gets tough. When you've planned ahead and you know what's coming in and going out, it makes it that much easier to react when challenges arise.
What things do you do in order to prepare for financial challenges, before they arise?