Even if you’ve lived the same life for twenty years, you still never know what will happen tomorrow. Unexpected events can leave us feeling unprepared and anxious. A financial backup plan is your emergency plan for when you’re struggling due to hardship.
An emergency budgeting plan can make a huge difference when the unexpected occurs. You may follow your usual home budget religiously and add part of your paycheck to your savings account every few weeks, but you may end up financially ruined with the right mix of catastrophic events. That’s even more likely for people who haven’t created an emergency plan.
You can follow some simple steps to create your backup plan.
The first is to track your current living expenses. This lets you know how much you need to spend on a monthly or daily basis. You should take a look at your current situation and your potential future situation.
The next step is to predict what expenses you might have in the future. As your children get older, the amount you spend will change. You might also have expenses like college tuition for your child, future homeownership, paying for your child’s wedding, or giving your child a car.
Your next step is to consider different scenarios that may occur. Your first scenario should be your ideal one. It describes the path your life will take financially if nothing goes wrong. But then you should consider how unexpected events like deaths, illnesses, natural disasters, divorce, or lawsuits can impact that future plan.
How prepared are you for if something unexpected happens? Do you have insurance? Do you have an emergency savings fund? How long will your savings last if you’re suddenly left without an income?
Insurance is a vital investment if you want to safeguard your finances. Different types of insurance can cover different needs. An ideal plan will cover your home, vehicles, healthcare, and your family members’ wellbeing.
Then it’s time to do a full evaluation of your current finances, including an inventory of your possessions and their values. Keeping a list of assets can help you if you need to sell belongings to supplement your income.
Finally, make sure that all of your paperwork is in order and that your family knows where to find important documents should you pass away.