Preparing for a financial emergency can help keep you financially stable whenever you have unexpected expenses.
There are several ways to prepare yourself for a financial emergency, including building an emergency fund, getting a line of credit, or considering different insurance options.
Here’s what you need to know about how to be prepared for your next financial emergency.
1. Build an Emergency Fund
An emergency fund can help pay for the car, your home, and unexpected medical costs. It allows you to rely less on using loans or credit cards and can also help keep you financially stable if you are unemployed for an extended period.
Many sources recommend saving enough to cover at least three to six months of expenses. If you’re a business owner, sole breadwinner, or have variable income, you should save nine to 12 months’ worth of expenses. Include putting money towards your emergency fund as a part of your monthly budget.
You can start as small as saving $5 a week to begin your emergency savings. Set a goal of how much you want to keep in total based on how much you spend each month.
2. Get a Line of Credit
A line of credit is similar to a credit card in that you can make payment amounts up to your borrowing limit. However, you’ll only pay interest on the money you borrow. The interest rates on a line of credit are typically lower than on credit cards. This flexible loan can be an excellent option for unexpected expenses higher than your emergency savings.
The maximum amount of a line of credit will depend on the lender, but generally, it may be between $1,000 and $100,000. Of course, your particular amount, rate, and terms will depend on your risk profile and creditworthiness.
3. Get Homeowners Insurance
Repairing your home after a small fire can cost between $3,000 and $5,000. If the fire destroys a more significant portion of the house, such as a roof or the kitchen, it may cost up to $50,000 to repair. Homeowners insurance is a policy that ensures your home’s structure and belongings if a destructive event occurs.
Destructive events can include fires, tornadoes, and vandalism. Additionally, because they are usually “package policies,” homeowners insurance can cover your liability for any property damage or injury to others caused by you or family members, including your pet.
4. Get a Life Insurance Policy
A life insurance policy can help protect your family financially if you die during the policy term. Getting a policy with a death benefit amount of at least ten times your yearly salary is ideal. Some sources also recommend adding an extra $100,000 for each child in your family.
Younger individuals can get a 10 to 20-year term life policy at a relatively low cost. In addition, the death benefit can pay for funeral costs and keep your family financially stable. Consider all these options to help keep you prepared for your next financial emergency.