How to Plan for Financial Emergencies

How to Plan For Financial Emergencies

If we learned anything from 2020, we learned that we each must prepare for financial emergencies. This may seem like a huge undertaking if you try to do it all at once but breaking your financial planning up into chunks can make it simple.

Create a Budget

Actually, create two budgets. Your first budget, you base on normal earnings and typical expenses. This represents your life when everything goes perfectly, and all the money comes in on time. This is your best life budget. It includes your housing, utilities, groceries, entertainment, dining out, and clothing plus sundries shopping. In your second budget, you only include the bare minimum items. This includes your housing, utilities, groceries, and sundries like soap, shampoo, and toothpaste. This provides you with the bare bones, bottom line figure under which you could get by each month. You need food, shelter, and utilities to survive. The rest you can do without.

Consult a Finance Expert

Talk to a financial planner or a broker at an asset management service. Approximately 74% of the individuals using an asset management service, do so during a financial transition. You can use them ahead of this to plan for a financial crisis. If you never experience that financial crisis, you will have created a larger death benefit for your heirs.

Build Your Savings Up

You can do this in numerous ways. Take on a second job or start a side gig. Place all the earnings into savings. To quickly build up an emergency savings account, use your bare-bones budget to live off of for two or three months in a row. Put all the money you did not spend into your savings account. This can help you from needing to max out a credit card for an emergency such as needing bail. You can go to a bail bond agency, an organization that acts as a surety by pledging its money for your bail, so you can enjoy freedom while waiting on a court date, but they require you to put up property as collateral for the bail. By having an emergency fund, you can avoid needing to take out a loan or use a bail bonds service.

Creating Tax Shelters

As long as you earn and save money, you will need to pay taxes. You can work with a certified public accountant to create a tax shelter that will reduce the annual amount you owe to the Internal Revenue Service (IRS). You also need to plan ahead for the estate taxes your heirs could potentially incur. If you die while single with an estate of more than $5,430,000 your heirs will need to pay estate taxes on the excess amount. For married couples, an estate limit of $10,860,000 applies. For example, if you die while married to an estate of $15 million, your surviving spouse will only pay estate taxes on $4,140,000 since the IRS estate limit protects the first $10,860,000. Estate taxes can eat up ten to 30% of the estate, so the better you shelter the estate, the more you leave to your beneficiaries. You can reduce your estate while you’re alive by making gifts to your beneficiaries. This can bring your total estate under the tax-free maximum. You can do this just a few months before your death if you received a diagnosis of a disease that lets you pre-plan a little. Otherwise, you can give gifts at a pre-planned age, such as 75 or 80.

Use Insurance to Mitigate Risk

When you purchase an insurance policy such as a homeowners’, condo, or renter’s policy, you save yourself from need to have as large an emergency savings account. That’s because your insurance covers your home’s damage incurred or the replacement of personal property lost to the named peril as the insurance industry refers to things like fire. Insurance also reimburses you for your hotel stay if you cannot reside in the home while it gets repaired.

A little financial planning goes a long way. You can take just a few simple steps and improve your financial resiliency.