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How to emergency-proof your finances



SUMMARY


It's advisable to emergency-proof your finances. By doing this, you can minimise the impact of any emergency, reduce stress, and position yourself better to weather any kind of crisis, be it a family emergency, a natural disaster, or a worldwide economic crisis.


Here are some key points to keep in mind:

  • Emergencies can happen anytime, so it's wise to have a plan to help you navigate a crisis.

  • Economic cycles typically involve upturns and downturns, so preparing for potential financial hardships is essential.

  • To prepare for unexpected events, consider building an emergency fund, reviewing your insurance coverage, creating a budget, and reducing debt.

  • Additionally, it's a good idea to appoint someone you trust as your financial and medical power of attorney and to have a will in place.



CONTENT


  • Economic cycles

  • Check your financial health

  • Create an emergency fund

  • Manage your debt

  • Check your insurance coverage

  • Have an adequate health insurance

  • Make a will



ECONOMIC CYCLES


The economy goes through cycles of booms and busts, making it challenging to predict when a recession will occur. However, downturns are inevitable. For instance, on September 29, 2008, the Dow Jones Industrial Average (DJIA) fell 777.68 points, marking the most significant point drop in history. By today's standards, those losses seem small compared to the considerable losses sustained during the 2020 stock market crash, which began on March 9 when the Dow fell 2,013.76 points, a 7.79% drop.


The economic crisis resulting from the COVID-19 pandemic made the 2008 financial crisis look small, and the stock market crash of 2020 marked the end of the 11-year bull market that started in March 2009. The Dow lost 20.3% of its value from its Feb. 12 high, signalling a bear market, and on March 12, it dropped 9.99%, losing 2,352.6 points. The 2020 crisis demonstrated that bear markets can happen, even in an otherwise healthy economy, but the markets rebounded in 2021 as optimism about vaccines and global economic recovery took hold.


We cannot predict when a crisis will occur, whether it's a natural disaster or a personal financial or medical emergency. Therefore, it's essential to have a plan in place that can help you and your loved ones navigate through the crisis.



CHECK YOUR FINANCIAL HEALTH


Being prepared makes adapting and responding to emergencies easier, so taking care of your financial health is essential. Start by assessing your income, savings, investments, net worth, and debt. There's always room for improvement, so here are some things you can do to enhance your financial health:


Create a budget and stick to it

Identify where your money is going and find ways to reduce costs. Ask yourself if you genuinely need something or if you could use something else you already have. Prioritise financial stability over immediate wants.


Save and invest a fixed percentage of your income each month

Include it in your budget and review your progress annually. Remember that starting early gives your money more time to grow. During economic downturns, avoid panic and think long-term. Consider investing even more during these times, but don't sell your investments.


Organise your essential documents and keep them in a secure location

For example, consider a safe deposit box for hard-to-replace items, collectables, and heirlooms. Don't store items you might need urgently, such as a passport or copies of legal documents like living wills, medical directives, or durable power of attorney.


Improve your credit score

Lenders favour strong borrowers during a recession, so having a higher credit score can help you obtain better rates and terms.


Designate a financial power of attorney

A financial power of attorney can make financial decisions on your behalf if you cannot do so due to physical or mental incapacity.



CREATE AN EMERGENCY FUND


Financial planners recommend building an emergency fund of three to six months' worth of living expenses, but saving more is even better if you can. Remember that emergency funds should only be used in true emergencies, such as job loss, medical expenses, or recovery from a natural disaster.


If you don't have an emergency fund or you've already depleted it, you might need to raise some quick cash. Here are a few options to consider:


  • Sell items from your home and garage on online marketplaces.

  • Consider taking a short-term loan from your 401(k) retirement account, but make sure you can repay it on time.

  • Be cautious when borrowing from friends or family, as it can strain relationships. Be clear about the terms of the loan and follow through on repayment.

  • Look for opportunities to earn extra cash. You can ask for a raise, work extra hours at your current job, or find a side hustle.



MANAGE YOUR DEBT


In case of an emergency, having little to no debt can make it easier to handle the situation. While good debt, like borrowing for college, a home, or a small business, can increase your net worth, bad debt, such as car loans, clothing purchases, and most credit card debt, can't generate income or value. Hence, it's always best to avoid bad debt, if possible.


However, suppose an emergency arises, and you can't pay your bills. In that case, several options exist, such as taking out a low-interest loan to consolidate high-interest debt, asking for debt settlement, or inquiring with your lender about debt relief programs. These options can help alleviate the debt burden and make it easier to handle emergencies.



CHECK YOUR INSURANCE COVERAGE


When it comes to emergency planning, insurance plays a crucial role. It's essential to review your insurance policies, including property, health, life, car, and umbrella, to ensure that you have adequate coverage and make any necessary changes. You may also consider disability insurance to replace your income in case of a disability that prevents you from working.


To save money on your premiums, you can take advantage of any available discounts, such as bundling your car and property insurance. It's also good to contact your insurance provider once a year, like when you receive your renewal notice, to ensure you're not missing out on any discounts or deals. Regularly reviewing and updating your insurance policies can prepare you for emergencies and unexpected events.



HAVE AN ADEQUATE HEALTH INSURANCE


Having adequate health insurance is just one aspect of healthcare preparedness for emergencies. To ensure you're fully prepared, it's crucial to have a medical power of attorney, a legal document that designates a person to act on your behalf in case you cannot do so.


It's also essential to note that anyone over the age of 18 must give written permission for someone else to receive their medical information, even if the other adult is their parent. If you have adult children, you'll need a medical power of attorney to decide on their behalf if they become incapacitated. Therefore, it's important not only to assign the power to someone in case something happens to you but also to ensure that your adult children and other adults in your family have these documents in place. By having medical power of attorney and providing everyone has the proper documentation, you can be better prepared for any healthcare emergencies.



MAKE A WILL


A will is a critical legal document that everyone needs, regardless of age. Together with medical and financial power of attorney, it sets forth your wishes and ensures they are carried out. If you pass away without a will, your wishes may not be fulfilled, and the court will take charge of your estate, incurring additional fees.


Additionally, a living will is another essential document that sets forth your wishes for medical care if you become incapacitated. It outlines whether you want to be resuscitated or if life support should be used to prolong your life. A living will can provide peace of mind for you and your loved ones and ensure your wishes are respected. By having a will and a living will, you can be better prepared for unexpected events and ensure your wishes are fulfilled.


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