How to Fortify Your Finances Against Unexpected Events

While it’s possible to plan and prepare for some of life’s major financial events—buying a home, having a child, retirement, and so on—there are also unexpected events that sometimes arise. Life can catch us off-guard, whether that means having your car break down, experiencing a sudden job loss, emergency travel, natural disaster, death in the family, or any number of other events that may cause stress and put pressure on your finances.

According to the Federal Reserve, nearly 4 in 10 Americans aren’t able to come up with $400 in savings to cover an emergency expense. Meanwhile, only 44% of Americans can afford to cover a $1,000 expense from their savings.

Luckily, there are proactive steps you can take to help lessen the impact that unexpected events can have. Read on to learn more about how to build up your financial resilience to help ensure you can weather any storm.

Understand your financial position

To best manage your finances during an emergency or other unprecedented times, it’s helpful to first understand where you currently stand financially—before an emergency happens. Assess your financial health by reviewing information, such as:

• Your credit report to learn your latest credit score, review your credit history, and check for possible errors or fraud.
• Income, including paychecks as well as side gigs, rental income, stock dividends, and other money you normally earn.
• Expenses, such as your rent or mortgage, utilities, groceries, and any other regular bills.
• Debt, which may include credit card debt, student loans, or medical bills.
• Savings, whether that’s in a savings or checking account, certificate of deposit (CD), bonds, and other investments.

Reviewing this info can help let you know where you stand financially, what resources you have available, and what your biggest financial priorities might be. For example, a financial assessment might highlight the need to increase the amount you're saving for retirement, or emphasize the importance of consolidating high-interest debt into a more manageable personal loan.

Create a crisis budget

A crisis budget is a special financial plan created to help you navigate a sudden emergency. It is different from a regular household budget in that a crisis budget helps you identify and prioritize expenses that are essential while minimizing, pausing, or eliminating expenses that are nonessential.

If a serious change should occur—such as a job loss, natural disaster, sudden large repair bill, or the passing of a family member—a crisis budget provides what you need in order to work, remain sheltered, and stay healthy.

Begin your crisis budget by separating your expenses into categories. Fixed expenses are ones that cost the same amount every month, such as your rent or mortgage, student loans, cell phone bill, car loan, childcare, and life insurance. Variable expenses fluctuate from month to month and may include utility bills (electricity, gas, water), groceries, and gas for your car.

It’s important to focus on paying your essential fixed expenses and scale back on variable expenses however possible. Try cooking at home instead of eating out at restaurants; pausing monthly gym and streaming TV memberships; and putting off buying clothes, vacations, or making home improvements. These are all effective ways of delaying nonessential expenses to save money.

It may also be prudent to stop paying down debt above minimum payments and to stop saving for retirement while you're being impacted by a crisis or emergency, so you have additional cash on hand. While changing your financial habits may feel uncomfortable or even counterintuitive, keep in mind these are temporary adjustments to get you through this difficult time. The goal for a crisis budget is to reduce your monthly expenses while maximizing the flexibility of your available funds during uncertain times.

Build your emergency fund

An emergency fund is simply money set aside for an emergency. An emergency fund, by nature, is supposed to help you avoid taking on loans or high-interest credit card debt which can further exacerbate the emergency.

How much to keep in your emergency fund will depend on your monthly income, expenses, dependents, and lifestyle. However, a general rule of thumb is to have enough money to cover at least three to six months’ worth of expenses. These funds should be easily accessible and ideally kept in a separate savings account than your regular savings to prevent accidentally utilizing those funds for a non-emergency.

Even when finances are tight, it’s possible to start or grow your emergency fund. If you are paid via direct deposit, it’s possible to set up a split direct deposit that moves a specific portion of money (perhaps 2% or 5% of your paycheck) into your emergency fund.

Instead of keeping funds in a traditional savings account, look for Bonus Rate Savings or high yield savings accounts with higher interest rates that can grow your account faster. If you receive money unexpectedly (for instance, in the form of a bonus at work, cash gift, or tax refund), consider adding it to your emergency fund.

Debt management during financial hardship

Effectively managing debt can go a long way towards getting financial obligations under control. Simple strategies can help you avoid high-interest costs, prevent late fees, and protect your credit score.

One of the easiest things you can do is paying bills as soon as they arrive, which reduces the risk of forgetting to make a payment and incurring interest charges or late fees. You can also avoid fees by always making the minimum payment on debts. In times of financial difficulty, it is often prudent to prioritize paying off high-interest debt first (also known as the “avalanche” method) because this type of debt costs more over time.

Another option is reaching out to creditors, such as banks and credit card companies, about ways to manage your debt. Gather together information about your income and financial situation, and try to work out a modified payment plan that lowers your payments to a manageable level or debt deferment, which is a temporary pause in loan payments. Other options include possibly reduced interest rates, lower payments over a longer period of repayment time, or even a full or partial write-off of the debt owed.

Consider new income sources

In addition to saving money and lowering debt, another good way to fortify your finances is by earning extra money. Running a side hustle can supplement the income you earn from your regular career. In the event of job loss, having another stream of revenue can also be a lifeline to help pay bills.

Nearly 40% of Americans reported having a side job to earn extra money. In this digital age, it’s easier than ever to find online work that can be done remotely, from freelance copywriting and editing to bookkeeping and accounting, data entry, web and graphic design, social media management, virtual sales, and beyond.

Gig jobs may be perfect for those on a tight schedule. This type of work only lasts for a set amount of time and includes consultants, caterers, food prep workers, event photographers, house-sitters, landscapers, massage therapists, tutors, dog walkers, and labor jobs.

There are also regular part time jobs that might be perfect for those looking for work after the normal 9-to-5. Depending on your skills and interests, hotel concierges, bartenders, rideshare and delivery drivers, customer service, general contractors, and construction workers are all examples of jobs with late or flexible hours that can help bring in some bonus bucks.

Plan for the future

Whether or not you’re experiencing an unexpected event in your life, it’s always wise to reassess your financial plan if you haven’t in a while (or create a financial plan if you never have before).

A solid financial plan is a roadmap to help you achieve your financial goals and navigate towards a secure financial future. However, just as your life goals and priorities at 25 look different than they are at 55, it’s important to revisit your plan regularly to assess your current finances, make sure you’re still on track for success, and adjust your financial plan if needed.

Another way to help safeguard against unexpected events is by securing insurance that can provide protection (and peace of mind) when it comes to your life, health, and assets. Different insurance plans offer different areas of coverage; for instance, disability insurance pays a percentage of one’s work income to cover essential living expenses in the event of injury or illness, while long-term care insurance can assist those that require medical care over an extended period of time.

Spend time exploring the various types of insurance available to determine which plans work best for your lifestyle. Although it’s impossible to predict the future, the proper insurance can help handle the curveballs that life can throw your way.

To learn more ways you can fortify your finances and how you can build a brighter financial future, learn more in our SmartMoney Hub for financial wellness education and resources.