Financial Emergencies and How You Should Handle Them

Financial emergencies are unexpected situations that can significantly impact your financial stability. We’ve all experienced this. Typical examples are medical emergencies, automotive problems, and home repairs. Handling those emergencies can be challenging. This article will explain how to do it. Some key takeaways to look for are:

• A financial emergency is an unexpected crisis that comes with a price tag.
• Common examples of financial emergencies include medical issues, job losses, home repairs, and car accidents.
• An emergency fund acts as a financial cushion, providing the resources necessary to cover unexpected costs.

What is a financial emergency?

A financial emergency is an unexpected crisis that comes with a price tag. Sometimes, you’ll be solvent enough to pay that price, but there may be other times when the price is too high. That increases the psychological and emotional impact of the situation. According to TIAA, 42% of Americans say financial stress impacts their mental health.

Life is uncertain. Inflation has increased the cost of living. Health problems are part of being human. Employers sometimes downsize or close up shop. These are scenarios that can create financial emergencies for working-class Americans. A retired or unemployed individual on a fixed income could have a financial emergency when their rent or utility bill goes up.

Common types of financial emergencies

Everyone’s economic situation is different, but some financial emergencies are universal. We can all get sick, lose a job, or get into a car accident. For homeowners, emergency home repairs should be expected, and many of them are not covered by insurance. Here are some examples of these and other financial emergencies you might encounter:

Medical emergencies

Emergency room visits can cost several thousand dollars. Specialized care for broken bones or chronic diseases runs significantly higher. These situations are usually unexpected, so they are classified as financial emergencies. Many Americans spend years paying off debt from medical treatment or surgeries, even when they have good insurance.

Job loss or income reduction

Rising costs haven’t just affected consumers. Businesses are also finding it more difficult to make ends meet. Increased operational and materials costs are sometimes offset by employee layoffs, reduced hours, or business closures. Losing a job in any of these circumstances can create a financial emergency if you don’t have savings to get by on.

Home repairs

Homeownership is expensive, and we’re not talking about just the mortgage payment. Urgent home repairs, like plumbing issues or roof damage, create financial unmanageability for average Americans with limited resources. Natural disasters are a common scenario when this might happen. Check with your insurance company to see if you’re covered.

Car repairs or accidents

There are around six million car accidents every year in the United States. The out-of-pocket average cost of those accidents can range anywhere from $5,000 to $60,000, not counting medical expenses if someone gets hurt. That can be compounded if your damaged vehicle is unusable and you need it for commuting to work.

Family emergencies

Parents understand this better than most people. Anyone in the family can have a financial emergency. That could be a younger child or an adult relative who needs your help. The situation will dictate the need for funds and your responsibility for covering those costs. Your financial situation will determine whether it’s a financial emergency.

Financial emergency preparedness

Having a financial emergency preparedness plan can alleviate at least some of the pressure when you’re dealing with life’s uncertainties. Being prepared for financial emergencies can also prevent you from making rash, short-term decisions that could worsen your financial situation in the long run. We’ve compiled the following suggestions to help you with that:

Step #1: Prepare for the unexpected

• Create a Budget: Calculate your total income and subtract your expenses to find out how much is left over each month. This gives you your savings budget.
• Identify Your Resources: Know where to access funds in case of an emergency, whether that’s through an emergency fund, loans, or insurance.
• Keep Emergency Information Accessible: Have important financial documents, such as insurance policies and bank account information, readily accessible.
• Build a Network: Identify reliable sources of financial help, such as family members, friends, or financial advisors, who can offer support if needed.

Step #2: Create and maintain an emergency fund

Experts recommend saving three to six months of living expenses in an easily accessible account. An emergency fund acts as a financial cushion, providing the resources necessary to cover unexpected costs. Follow the steps below to set that up:

1. Start Small: If you’re starting from scratch, aim to save at least $1,000 to cover small emergencies. You can increase that amount as your life circumstances change.
2. Set a Target: Work towards saving three to six months of living expenses, depending on your lifestyle and financial situation. Include non-essential expenses.
3. Automate Savings: Set up automatic transfers to a dedicated savings account each month. Keep it separate from the checking account you use to pay bills.
4. Cut Back on Non-Essential Spending: Redirect money from non-essential expenses (e.g., eating out, subscriptions) toward your emergency fund.
5. Regularly assess your savings goal: Adjust your contributions as needed to ensure you have sufficient funds to cover your basic needs.

You’ll want to be able to easily access your funds. A high-yield savings account or money market account can provide that for you. Don’t use an investment fund where you’ll need to sell securities and wait several days for a fund transfer. You’re not looking for a return. The purpose of an emergency savings fund is to have money available when you need it.

Options for emergency financial help

Personal loans are often the best choice to cover emergency expenses. They typically have lower interest rates than credit cards, and you can apply for a loan online or at a traditional bank or credit union. You don’t need collateral for an unsecured loan, but approval may be based on your income and credit score. Monthly payments are fixed, making them easier to budget.

Emergency loans are loans specifically designed for urgent situations, with quick approval and fast disbursement. These are particularly useful if you need immediate cash for a sudden emergency. Examples of this are a job loss, eviction proceeding, or medical expense. Emergency loans can provide you with immediate funds for those within twenty-four hours.

Credit cards are another option. They should not be your first choice for emergency funding due to high interest rates, but they can be an option for covering short-term emergencies if you can pay them off quickly. You can also use them for a cash advance if you need to pay for immediate needs like food, lodging, and transportation.

Borrowing from family or friends is another option, but this may be difficult because it can strain relationships. The best way to avoid that is to treat it like a regular business deal. Draw up a loan agreement and set clear repayment terms. You might want to have someone witness the contract so you have a third party to rely on if there’s a dispute later.

Our final option is insurance. Certain types of insurance, such as health, auto, and home insurance, can help mitigate the financial burden of emergencies by covering a portion of your expenses. Read your policies carefully because some emergencies aren’t covered. Floods, hurricanes, and tornados are examples of this if you live in certain areas.

Conclusion

Financial emergencies are a fact of life, but with the right planning and resources, you can handle them effectively. Building an emergency fund, knowing when to seek emergency financial help, and preparing for the unexpected can help you navigate these challenges. Knowing your funding options is the first step in finding a solution.

It’s important to start planning and preparing for potential financial emergencies before they occur. Begin building your emergency fund and exploring your options for emergency financial help today to protect your future financial well-being. Figure out your budget, set a target savings goal, and create an emergency preparedness plan.

By taking proactive steps to handle financial emergencies, you can reduce the stress and financial burden when faced with unexpected situations, giving you the peace of mind to focus on solutions rather than the crisis itself. We encourage you to explore our emergency loans page for a potential solution to your financial emergency needs.