How to Prepare for a Financial Emergency

Emergency funds and insurance options can keep you covered, no matter what happens.

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by NEA Member Benefits

Key takeaways

  • With a safety net in place, you’ll be ready for unexpected, financial emergencies.
  • Gain peace-of-mind by setting aside three to nine months of expenses.
  • You can cover yourself for just about everything with a wide-ranging insurance portfolio.

Financial emergencies happen to everyone. But, with a safety net in place, you can get ready for them in advance. Here’s how to do it:

Build an emergency fund that will cover three to nine months of expenses

This should be kept in savings, with the understanding that you won’t touch it unless an emergency comes up. Allocate an affordable part of your take-home pay every month to build up the fund and determine realistic timetables for goals such as “Have three months of expenses set aside within a year and a half.” If you need flexibility, then designate three months of the fund for unexpected expenses that don’t quite qualify as emergencies, and the rest for a genuine emergency.

Consider various insurance options that help protect against financial emergencies

Homeowner’s insurance can guard against loss from fire or theft. Collision insurance for the car―which is generally optional even when liability insurance is required―protects against the loss of much-needed transportation or costly repairs. Disability insurance―which is offered by many companies but can also be purchased individually―guards against loss of income due to injury or illness. If you have dependents who rely on your income, you probably want to consider some or all of these. Then, for later in life, long-term care insurance can protect your spouse or children against the high costs of providing home or institutional care for you.

Invest in savings products designed for major expenses that are not unexpected

These would include tax-advantaged retirement funds and college savings plans. Most college savings plans allow you to invest in your child’s future education―and then take the money out tax-free. For a retirement plan, if an employer offers to match part of your contributions, then it’s like getting free money! Not only that, but you lower your tax burden with every contribution you make. Another option: A Roth IRA, for which your withdrawals on earnings are tax-free.

Get your financial “house” in order

Lowering your credit card balances will save money while giving you the flexibility to handle an unexpected situation. Establishing a home equity line of credit (HELOC) (but not using it until you absolutely have to) will take care of home expenses that “pop up,” like a new furnace or air-conditioning unit. In general, growing the equity in your home as quickly as possible creates the kind of financial freedom that can empower you to take on anything else that comes along.

Open a checking account at a credit union or community bank

These institutions are likely to value you as a person, rather than just a credit rating. They can approve you for a personal line of credit to help with an emergency.