Financial Preparedness: How Getting Out of Debt and Savings Are Key Parts of Emergency Preparedness
Emergencies come in all shapes and sizes. Sometimes we focus on preparing for the big natural disasters but overlook the more common personal emergencies of unemployment or illness that can be equally devastating for a family or individual.
One of the biggest ways you can prepare for an emergency of this nature is to get out of debt and build an emergency fund.
Getting Out of Debt
If you have debt, chances are you already know about the challenges debt presents firsthand and would like to pay your loans off. So how exactly do you do it?
You hear about it all the time, but starting with a budget can have a large impact on your finances. Budgets help you see where your money is going and identify places you can reduce or eliminate expenses. If you’re like most people, you probably don’t even realize how much money you spend on little things like going out for lunch at work or picking up a soda on the way home. Even cutting back a little bit each month in a couple of areas can go a long way to paying off your loans.
Next, itemize all of your debt. Figure out the total amount for each loan, what your minimum payments are each month, and the interest rate. After you pay all of your minimum balances each month, then focus any additional money you can contribute on the loans that have the highest interest rates. The faster you pay these off, the more money you will be able to save in interest rates and apply to your other loans.
For more information on resources to help you get out of debt, have a look at Power Tools for Family Finances.
Building Your Emergency Fund
If this is new to you, don’t get overwhelmed by thinking about the whole picture just yet. Start small. How much do you spend from one pay cheque to the next? Write that number down; that’s your first savings goal.
Then go back to your budget. Identify how much is left over after you cover your normal expenditures and if there are any expenses you can decrease. Add together these numbers and write them down. Next, figure out how many months it will take you to reach your first savings goal if you put away this amount each month.
If this is something you struggle with, you might want to consider talking to someone you trust about your financial goals so that they can help you stay accountable.
Once you’ve saved the amount between pay cheques, expand it to two, then three. The ideal emergency fund includes enough money saved so that you could live off of savings for several months if needed or so you can cover unexpected medical costs or home repair emergencies without having to go into debt.
Not only will these practices help you in the case of an emergency, but they also bring increased peace of mind and financial freedom. Don’t wait until next New Year’s to make a change. Start today!