No matter how well you plan, crises happen. It’s important to be as prepared as possible to handle them, especially when it comes to money. That’s why Easy Money is asking the experts how to start planning for a costly emergency, regardless of your personal situation.
Before we dig into tips and tricks, remember: no amount of personal planning can replace larger social change to address the structural inequalities that leave some of us with more than enough while others have very little.
Don’t be hard on yourself if you’re facing an emergency you’re not prepared for or if you won’t be able to save up what you think you’d need in an emergency fund. You can still make your situation better, which can help you feel more secure and give you a firmer platform on which to build your life.
Think strategically about risk
You can and should put cash away — more on that later— but everyone, regardless of financial situation, can be better prepared to weather a financial storm.
That preparedness should start with your mindset, says Thuy Lam, a Certified Financial Planner and money coach who works for Objective Financial Partners. Lam’s company offers fee-only services, which means that they don’t earn a commission when they make referrals to specific financial institutions or services.
“What I normally encourage people to do is actually sit down and identify the potential types of financial emergencies you could face,” she says. Consider your liabilities: Do you own a car that could break or a home that could be damaged in a natural disaster? If you rent, do you have a roommate who could move out suddenly, or do you live in a building that isn’t subject to rent control? Do you have a pet who could get sick? Would you need to replace your phone immediately for work if it got damaged? Questions like this let you define the term “financial emergency” for your personal situation, Lam says.
After you’ve done this, she recommends considering whether insurance could help ameliorate your risk — look at the deductible on home, car, or renter’s insurance you already have and at whether you can (or should) insure your pet or your devices. It could make a big difference if your cat got sick or you broke your phone.
This process can also help you figure out how big your emergency fund should be. “Know what the deductible is on your insurance coverage,” she says. “That deductible, you would want to have the funds available.”
Give yourself credit
Considering your risk profile and how much you can reduce risk with insurance is helpful, but when a financial emergency comes up, you still need to be able to pay for it quickly. Thinking creatively before the emergency means it will be less scary: “When that time arises when you face [a crisis], take some time to sit back and let yourself feel the feelings,” says Lam. “Know that you have a plan in place, and take the time to assess what is the best way to be able to deal with that financial emergency.”
She suggests sitting down to make a list of resources you might be able to use in an emergency — for example, friends or family you could borrow from in a pinch. (You should probably learn how to make a repayment plan if you take this route.)
Since that option is likely to have a very low interest rate, it may be the least costly to you if you need to borrow. Debt can be helpful, especially if you’re living paycheque to paycheque and won’t have cash to meet an unexpected expense. But make sure you have a sense of how much that debt will cost and how you plan to repay it; otherwise, you risk getting into a situation that will be hard to get out of.
Renée Sylvestre-Williams, a finance and business journalist who writes The Budgette, a newsletter about money for single people, suggests looking at your credit options ahead of time to figure out what’s available to you. Many of them take some time to set up.
“If you’re very fortunate, and you own property, for example … you could possibly take out a [home equity line of credit] on it,” she says. In an emergency situation, you can borrow from it at an interest rate much lower than that of, say, a credit card. You may also be able to get a small, unsecured line of credit through a bank (here’s some info on how they work).
If that’s not an option, says Sylvestre-Williams, consider a low-interest credit card. “You could have that and keep it with you just in case,” she says.
As a last resort, Sylvestre-Williams says, you could look at a payday loan. These short-term loans can come at a steep interest cost and have punitive terms, she says, so make sure you read the fine print: “I would honestly say do that if you have exhausted everything else.”
How to save up an emergency fund
Having some of your own money stashed away for an emergency is the gold standard when it comes to financial preparedness. Conventional wisdom says you should try to save up three to six months of living expenses in a fund earmarked for emergencies. That might seem like a big number — but you can take steps to cut it down to size.
One of the best ways to start is to budget, says Sylvestre-Williams. Budgeting lets you know how much money you actually have to spend, she says, and gives you a good sense of how much is going to essentials like rent, mortgage, and food. (Never budgeted before? Easy Money has your back.)
“I encourage people to figure out what is the minimum price tag to your life,” says Cindy Marques, a Certified Financial Planner and director at Open Access Limited, a group-retirement planning company. “I think it makes it a lot easier when people see a reduced number as opposed to just three to six months of their entire income.”
Once you know how much you could reasonable pare back in a crisis, you can set a sustainable savings target for your emergency fund.
Then, start setting that money aside in a special account that you don’t access for other reasons. All three experts interviewed agree that a high-interest savings account is a good option. They caution that you want to make sure the money is quickly available if needed — in other words, don’t invest it.
Don’t worry if it’s going to take a while to build up that cushion. “It doesn’t have to be a lot. It’s more the consistency than the amount,” Sylvestre-Williams says. “If you have $5 or $10 and you do not need it for anything else, put it aside.”
Marques suggests treating emergency savings like an essential. After all, she says, a financial emergency is bound to happen sooner or later. That means an emergency fund isn’t just a “nice to have,” she says. She recommends setting up an automatic withdrawal to your emergency account that lines up with your paycheque so that your emergency fund becomes an “extra deduction,” almost like employment insurance.
“If you treat your future like a mandatory bill that needs to be paid,” she says, “you can approach it a little bit differently.”
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