How Do You React to Financial Emergencies?

by Kevin on September 6, 2010

We aren’t always financially diligent. We slip. We stumble. We spend money we shouldn’t spend and we don’t save the way we should.

But what if you’ve corrected those behaviors? You’ve started (or maybe finished) saving up an emergency fund of 6 to 12 months of expenses. You spend less than you earn.

In short, you’re making progress.

Before you have time to get comfortable disaster strikes.

Handling Financial Emergencies

The car dies. A tree falls on the garage. You break your arm. Your company gets bought out and lays off your entire division.

Frustrating emergency. Scary emergency. Painful emergency. Life changing emergency.

Just as soon as you were making financial progress an emergency pops up in your tracks. You slow down. You stop. You may even take a few steps back.

We’ve all experienced these types of emergencies. Some of us were prepared financially, some of us were not.

How should you react?

Breathe First

Stop. Before you do anything you need to breathe.

Our first reaction during an emergency is to do something, anything. It’s part of that fight or flight instinct deep within us.

A quick, rash decision that we haven’t put any thought into is not the right way to react to an emergency. Sometimes a quick reaction is needed to get you and your family safe and secure, but once you’ve resolved basic needs take a step back.

If you didn’t think it through you might rush to the bank to cash out that certificate of deposit (and end up paying an interest penalty) rather than realizing you had enough money in your budget to handle it this month.

Analyze the Situation

Take an honest assessment of the situation before making a huge financial decision.

Let’s use the car dying example. A rash decision would mean paying any price to get the car fixed. It would mean trying to find someone to fix it immediately. This weekend. Now. Over a holiday. Surely someone will take all of my hard earned cash to get me up and running for next week.

If you took a step back you might consider if the car was worth fixing. Or if you could wait until a non-holiday to get a diagnosis. Or if you were able to have someone diagnose it today that you wouldn’t be obligated to paying outrageous fees to get it fixed because you would get up front pricing that you could sleep on. If you absolutely needed wheels today you could rent a car or borrow one from a family member or close friend.

In other words you would look for other options with a clear head rather than emotionally reacting to what has happened. It’s a smart move.

Have a Plan to Fall Back On

The best way to handle any emergency is to have a plan in place for that specific situation.

Of course you can’t create an intense detailed plan for every situation that could pop up. But you can plan for the major disasters that could strike.

Here’s some emergencies to consider planning for:

  • income emergencies like job loss, pay cuts, or furloughs
  • house emergencies like appliances dying or structural issues like holes in the roof
  • medical emergencies that might require disability insurance (this also ties into income emergencies)
  • car issues like the battery dying, on going maintenance, or major engine or suspension part failure that would prevent you from getting to and from work

Of course you need to know how large of an emergency fund you need before you can make any plan. (And you did know that amount for one income families is different than two income families, right?)

{ 1 comment }

Disability Insurance March 25, 2015 at 1:40 am

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