What would you do on the first day of a Financial Emergency? Maybe you or your spouse was laid off at work or you had a medical emergency that will prevent you from working to your previous capacity. Its possible you suddenly have to take care of a family member and take on a significant financial burden.
Would you know what bills you can cut? What services you can cancel without repercussion?
Read on if you want some tips for creating your own Financial Emergency Plan:
Financial Emergency Plan: Preparation Phase
The Preparation Phase is your “status quo” where you are employed and in good health. The below steps can occur concurrently or you can tackle them on a 1 by 1 basis.
Build Your Emergency Fund
This will be the hardest part of the Preparation Phase, I don’t believe you need as much money saved up as a lot of the experts recommend. Our goal is $10,000, which is under 2 months of expenses if you count Student Loan payments. Consider your Emergency Fund the first line of defense against disaster.
Read my Emergency Fund post for more information
Gather Relative Information
This step is all about having the information you might need in 1 spot for future reference
- Cancelling Services – What is the process for cancelling a service you can live without? Gather the phone number, website, username/password and any other relevant account information. Also, check to see what kind of contract you are in with the provider.
- Medical Information – What is the out of pocket maximum under your insurance plan? Do you need to go to a specific hospital or use a specific network?
- Unemployment – What is the process for getting on unemployment in your state? How long until the benefits go into effect and how long do they last? For example Minnesota’s rules are 50% of your wage, for up to 26 weeks.
I have a spreadsheet with all the relevant account information for everything in our Emergency Plan. I would share it but it doesn’t provide much value unless you use all the same companies we do.
Update Your Resume
If you have worked for the same company for awhile, there is a decent chance you haven’t taken the time to update your resume and cover letters. The last thing you want to do if you lose your job is take the first few days putting together your job history.
Have it ready for external companies, the last job I applied for was internal and my resume reflected that.
Financial Emergency Plan: Phase 1 Actions
Defining Phase 1 as the first month of a Financial Emergency. Most of these actions can be completed in 1 day if necessary.
Cut out services you can live without, extra principal payments and some of your investing (if applicable). This step uses all the information gathered in step 1 to speed the process up.
- Cancel Cable Subscription – Save approx. $70 a month. We are on a month to month plan so there are not any charges for cancelling our subscription.
- Drop Extra Payments on Student Loans – Cut $200 a month. Simple form filled out online, takes about 10 minutes.
- Cancel Auto Transfers to Brokerage and Roth IRA accounts – Cut $520 a month. Cancel auto transfers in E*Trade
By doing the above actions we could cut $790 from our expenses in under an hour. I have more examples if anyone wants an in-depth look.
Financial Emergency Plan: Phase 2 Actions
Phase 2 is from 2-6 months. I picked this range because after 6 months you should be able to recover from a job loss and have a plan moving forward in medical situations.
This phase has more drastic cuts than Phase 1 for us:
- Drop 401K Contributions – We would drop them to the minimum amount to collect our % match. Can be done through online portal in 5 minutes.
- Take Insurance off Second Car – We rarely use our second car and could get by without one with a little planning. Save about $40 a month. 15 minute phone call.
- Switch Cell Phone Providers – We are off our contract next month and will be able to switch providers without any issues. I put this under Phase 2 because we like our service area of our current provider, but would switch if we needed to.
Financial Emergency Plan: Last Resort
If we are unable to find a job, or the medical situation is severe enough that you are going to be in “emergency mode” for 6 months or longer you might want to consider these steps:
- Selling Vehicles – If you have a newer vehicle and can downgrade or a vehicle with a loan it is worth looking
- Selling Home – If your home is worth more than you owe, or you have to much home for your needs this could be a solution
- Take “Under-employment” job – At this point I would be taking any job available even if it below my experience/education level just to stay afloat.
- Borrow against your 401K – Have not researched this part completely yet, but it is a possibility if we get desperate.
Just having an emergency fund might not be enough, review your circumstances and start to outline an Emergency Plan that you can put into action.
Make your plan specific and actionable. “Spend less on groceries” isn’t a plan unless you actually think of ways to make it happen.
Focus on the first 2 phases, the “barrier to exit” is way lower than anything in the Last Resort phase and can be just as effective.
We could definetely cut a lot of unnecessary expenses out in phase 1 and 2 (groceries, alcohol, etc) but I decided to focus on one-time actions that can substantially alter your situation quickly for this post.
It is impossible to plan for every situation, if you have a plan you can go “a la carte” on what parts you put into action and it identifies which actions save the most.