When you don’t have an emergency fund, an unexpected expense can become a crisis. Even if you do have emergency savings, an event like a huge storm can create a financial impact beyond what you’re prepared to handle.
When a financial emergency hits, there are some things you can do to make sure you weather the storm – literally or figuratively – as well as possible.
Four Steps to Take During a Financial Emergency
Step 1: Don’t Panic
It’s very easy to go into “crisis mode” as soon as a financial emergency occurs. This is understandable, but in general, the best decisions are not made while panicking. How many times have you regretted the choices you’ve made when you were upset even after a small emergency? That’s what is best to avoid.
One of the best pieces of advice in a disaster is to set a time period – maybe 24 hours, or possibly even less, depending on the type of emergency – during which you won’t make any major decisions.
This gives you time to think things through and helps you avoid actions that might be harmful in the long run.
Step 2: Gather Your Resources
While you’re analyzing the situation in order to be best prepared to make decisions, you can use your “hold on and think” time to gather the resources you need. This might mean finding your insurance coverage documents, checking your account balances, or even calling friends or family members for their help or advice.
Having all the right resources on hand is the biggest step to making better-informed decisions.
Step 3: Prioritize
What are the biggest and most important needs you are facing? Following a natural disaster, that might be food and shelter. Following a washer overflow, it might be preventing mold and property damage. After a job loss, it might be reducing expenses as much as possible until a new position is found. In any situation, deciding what’s most important will guide all of your decisions.
Prioritizing is very helpful in avoiding the panic-induced decisions mentioned earlier. For instance, if your top priority is shelter, you may need to create some extra cash flow to pay your rent or mortgage. But if your job requires a commute to work, selling your car for rent money is almost certainly ill-advised.
Knowing not only your top priority but the things that support it is important.
Step 4: Get to Work
When it’s time to take action, the key is being realistic. If you need to raise $300 for a car repair, a yard sale might be a great course of action. If you need $5,000 to fix your home’s HVAC system, that may not be the most realistic method.
While there’s no value in being pessimistic, in a financial emergency, it doesn’t pay to be overly optimistic either. If you’re laid off from a job, continuing to spend as always and assuming “Oh, I’ll find a new one right away” is probably unwise. Understanding the reality of the situation will help you set and follow a plan of action.
Finally, the biggest step to take after any emergency is to prepare right away for the next one. If you’ve used up your emergency fund, make a plan to build it back up over the coming months. If you don’t have such a fund, commit to creating one.
Emergencies happen – but the more you plan, the fewer things will arise that reach the level of catastrophe. Keeping good records of where your finances stand can help to prevent financial emergencies.