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The 5 best ways to financially prepare for the absolute worst

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Bad things happen in life. How well people overcome these events depends on how well they planned ahead. This is especially true for those unexpected situations that affect people financially.

Below are five must-haves to help you financially prepare for the unexpected.

Get disability insurance

One of the most disruptive unexpected events is an injury or illness that limits your ability to work.

Not only are there health care expenses to cover, but having to miss work for months or even years means losing the income you need to live.

According to the Social Security Administration, about 25 percent of 20-year-olds will become disabled at some point before reaching age 67.

Disability insurance covers the potential loss of income caused by injury or illness. If you are unable to work because of a covered disability, the policy will replace part of your income. You will receive these benefits for as long as you’re disabled or up to a maximum period of time spelled out in the policy.

Having long-term disability insurance means being able to buy food, pay bills, and cover household expenses while you’re unable to work.

Get a personalized disability quote in seconds.

Oh and life insurance, too

Death can often be an unexpected event. This is especially true if you have a family that depends on your income. If you pass away unexpectedly, your loved ones will be affected not only emotionally, but also financially.

One of the most important ways to prepare for the unexpected is to insure your life with a term life insurance policy. The death benefit from your policy can help financially support those left behind. This money can cover basic living expenses, pay off a mortgage and other debts, and be saved to eventually help fund your children’s college education.

Build an emergency fund

Unexpected events aren’t always as drastic as illness or death. Anything from a car repair to a job loss can lead to unbudgeted expenses.

One way to financially prepare for the unexpected is to save money in an emergency fund.

An emergency fund is a pool of money that you set aside to help you through unexpected events that can hurt you financially. Having this fund can fortify your financial safety net and minimize the stress of an emergency with financial consequences. Without an emergency fund, you may live in fear of crisis — and crippling debt that may follow if you're not prepared.

Financial experts suggest your emergency fund hold an amount equivalent to at least three months of take-home pay. Another rule of thumb is to have enough to cover essential expenses for three to six months in the event you have no income.

Create a backup budget

Your current budget is probably based on your current income. But what happens if you lose some of that income due to a disability or a job loss or change?

To prepare for the unexpected, you should create a backup, or fallback, budget. This is a spending plan for when life isn’t ideal. It removes all the unnecessary items from your current budget and leaves just the essential expenses.

Why do this? It’s easier to adjust to having less income if you’ve planned for it. At the beginning of a crisis, you may not be thinking clearly enough to make necessary cuts in your spending.

Devise a plan to conquer debt faster

Unexpected financial events are made worse if you owe money. You can better handle these situations if you reduce or eliminate your debt.

Focus repayment efforts on high-interest rate debt, such as credit cards and retail accounts.

If you have several personal loans, medical bills, and/or multiple credit card balances, you should consider consolidating those unsecured debts into one loan.

In addition to simplifying your life to one monthly debt payment, you can also potentially lower your interest rate and the amount of money you spend each month on loan payments.

Debt consolidation can be done through:

  • Transferring debt from high-interest loans and credit cards to a low-interest credit card
  • Taking out a debt consolidation loan and using the loaned funds to pay off the balances on your unsecured debt
  • A home equity loan if you have sufficient equity in your home

The key to financially preparing for the unexpected is to hope for the best and plan for the worst. Sacrifice some of your income today toward buying insurance and putting aside money. This won’t necessarily make a crisis easy to overcome, but easier.

The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.

— Published December 5, 2019
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