While not all unforeseen events are adverse, the big ones that affect your future tend to be negative surprises. This possibility of unanticipated financial hardship means you may need to alter the way you manage money. Planning and saving now will make those emergencies and unexpected turns easier to handle when they come your way.
If you’re lucky, you’ll have time to discuss and prepare for these momentous occasions and play a winning game. However, some significant life changes can take you completely by surprise. Consider the advice below to get financially prepared for a few real-life case scenarios.
Table of Contents
- 1 How To Deal With Financial Life-Changing Events
- 2 Tips To Prepare For A Financial Crisis
- 3 Bottom Line
- 4 FAQ
How To Deal With Financial Life-Changing Events
Are wedding bells around the corner? Are you expecting a baby soon? Perhaps you’re facing a job loss or going through a messy divorce. Whether good or bad, these unexpected life changes carry daunting monetary challenges. Here are a few major life-changing circumstances and how to keep your finances healthy when such events strike out of nowhere:
Walking down the aisle has an enormous impact on the funds of newlyweds. Though marriage will join two incomes, it most certainly, will combine two sets of debt. Hence, it’s crucial to talk about money before you take the plunge.
If not before, it’s time to sit down together after the big day and set your mutual financial objectives. While your charming fiancé may seem the perfect man, he could be lugging a significant debt. Hence, be honest about money issues and find a strategy to overcome the challenges.
Set your budget priorities and goals for the future. For instance, do you want to take a mortgage or save up for a home first? Do either of you want to go back to school, or are you planning a baby? Many young couples decide to set aside for a worldwide travel adventure, so you might also want to consider this.
Once you define clear objectives, figure out the most viable way to pay for these goals. One of the most thoughtful approaches is to open accounts for short and long-term savings. To save in the long run, sign up for your employer’s retirement plan. You may also contribute to a mutual fund or a Registered Retirement Savings Account.
For short-term savings, it’s best to set up a high-interest savings account. Such money can get used for immediate expenses, like a new car, vacations or medical bills. Last, you’d better have an emergency fund in case of a significant car breakdown or job loss.
Buying A Home
Most Americans own their own homes, and about 10% rent or re-sell their property. If this is your case, real estate can play a significant role in your saving and investing strategy. Conversely, young couples and individuals who wish to purchase a home should consider whether building or buying a house is more convenient.
Homeowners know that many things around the house can go wrong. Heating and cooling systems can break, roofs can leak, and appliances can malfunction. So, having a separate fund for home emergencies will help you stay prepared for these events. You may also use your home’s equity to remodel before the place starts to falter.
Many decide to purchase homeowner’s insurance to cover theft and unexpected damage. You can also arrange natural disaster insurance to protect your property. Finally, think about correctly titling the property you buy. Depending on your situation, you can hold real estate individually, jointly, or in a trust to protect assets and facilitate estate tax planning.
Having A Baby
There comes a time in life when you start planning to expand the family. Ideally, most of your debts should get settled by then. Responsible parents also set up long-term and short-term savings accounts when the bun comes out of the oven.
Yet, bringing a child to this world requires a complete financial overhaul and using some baby saving hacks. Besides, babies aren’t cheap, and you have countless expenses to cover, including food, diapers, and clothes. You’ll probably spend over $200,000 for each child over its lifetime, excluding college costs.
Prepare for the baby by building up some solid cash reserves. Focus on saving up at least six months’ worth of living expenses before the baby’s due date. Once it arrives, purchase a life insurance policy to protect your child financially if something happens to you or your spouse.
It’s also advisable to set up a college fund as soon as the baby turns three. Do so even if you believe your kid will win scholarships. Talk to a financial advisor to discuss your options and select a college savings plan that best fits your family budget.
Losing Your Job
In today’s challenging and fast-turning economy, job loss has become a frequent sight. Whether you get fired, redundant or resigned at your own will, becoming unemployed can shatter your finances. A grave mistake almost all recently unemployed people make is not getting ready for the worst. It’s up to you to be responsible and have some money aside in case of unemployment.
Having no job means you should hold off your credit card and curb your spending habits. The first step you must take is to cut back on unnecessary items. To do so, compile a list of your monthly living expenses and calculate how much money you can afford to spend each month. If costs exceed the available funds, it’s time to trim some fat.
Start by eliminating the luxury expenses. Get rid of restaurant dinners, manicures, expensive cable or satellite TV packages, memberships, and other extras. If your bills are still too high, consider slashing high car payments and even selling your vehicle.
Finally, find a part-time job to compensate for the temporary loss of income. It’s essential to enhance your dough as much as possible while looking for a new full-time job. Your goal is to make ends meet without taking on debt and going into bankruptcy.
Getting married is an important event in every person’s life. It’s also a serious change in one’s finances and requires lots of planning beforehand.
Starting Your Own Business
If you have a startup in mind, ensure your financial and investing strategies are on the right track. Before anything, you must have enough money to launch your business. In case you lack funds, consider whether you can profit by turning your idea into a home-based business first.
Once you’re ready to put your business idea in place, you will need to decide on the proper business structure. Depending on the establishment, you’ll have different expenses, liabilities, and earnings. Moreover, it’s best to keep your personal and business accounts separate to protect your assets from exposure to the businesses’ risks.
Next, check whether you titled all your assets adequately. Also, ensure you have adequate life, health, disability, and liability insurance to keep your family and the business safe and sound. Your estate plans and documents must always be up to date, too.
Last, develop an exit strategy involving an agreement to sell the business funded with life insurance. As for family businesses, you’ll need an ownership/management plan for the next generation. We suggest you support it through trusts and gifting strategies.
Going Through Divorce
Sadly, the daydream of happy wedding bells can often turn into the nightmare of a divorce. Over 40% of all married couples in the US end up divorcing. But besides the overwhelming emotional stress, divorce can also create money problems.
If you’re facing a break-up, meet with your financial advisor as soon as possible. They can assist you in redirecting your monetary goals and reorganizing your investment portfolio. If you’re struggling to survive on one income, you may consider liquidating some investments if the tax consequences aren’t severe. Whatever you do, don’t give up saving. Though you may have less money to live off now, you can still build up a healthy nest egg.
Indeed, life is a roller-coaster with unforeseen twists and turns, some exciting, others terrifying. A minor shift can throw you off track and put your finances in the red if you aren’t flexible.
The key is to stay prepared for any scenario and act as quickly as possible when unexpected life changes come your way. The sooner you adjust your finances to your new life and learn to save money in the divorce, the better off you’ll be.
Deal With An Illness Or Injury
Facing a severe illness, injury, or disability is not a rare sight in the US. Today, almost 20% of the adult population live with a milder disability, while 10% are severely disabled. Hence, it’s vital to have a backup plan for sudden health issues that might shatter your financial goals.
Even if you are disabled for a short time, your income will reduce drastically. Even worse, any long-term disability can devastate your budget. In such cases, your employer may offer disability insurance, but what if that coverage is insufficient? Indeed, you will certainly need to arrange private coverage.
The best approach to ensure financial stability in case of injury is to maintain adequate health insurance at all times. In case you’re self-employed, purchasing disability income insurance is also paramount. Consider buying a hybrid product that includes both life insurance and long-term care coverage.
Finally, think about appointing someone you rely on to manage your money and health care affairs if you no longer can. Meaning, consider setting up joint accounts, powers of attorney, and a health care proxy. If you are incapacitated, trusts can help you provide continuity in managing and distributing cash to your close family.
Caring For A Family Member
Taking care of a family member is demanding both in terms of finances and time. Plus, you’ll probably have many decisions to make, like day-to-day money management, living arrangements, and long-term care costs.
Though such conversations may be unpleasant to start, it’s best to talk to your beloved ones early. Open communication will benefit all sides involved in the issue. At this point, every family member must be familiar with the process and on the same page.
Start by gathering documents, such as contacts, account numbers and legal documents. Double-check whether birth certificates, insurance policies, and wills are still valid. Then, explore the caregiving costs, including tax benefits for dependent care, long-term care insurance, and monetary assistance.
Further on, make caregiving arrangements and check all applicable fees. Before anything, you must prioritize your long-term financial health. Dipping into your savings or scaling back at work to cover caregiving costs may sound like a convenient fix. Yet, it’s best to avoid putting your future well-being at risk when helping your loved ones.
Losing A Loved One
Besides being emotionally ravaging, losing a family member is also money draining. Depending on the situation and your relationship with the deceased, you may have to sort out all financial matters. Meaning, you might need to settle debts, apply for life insurance benefits, or sell some estate. If the deceased didn’t have a detailed plan to ease the burden, you might have to step in and tie up all loose ends.
Moreover, sometimes you will have to rely on your elderly parents for funding. For example, a sudden spouse death might come as a monetary shock. You will have to foot the bill for funeral expenses and cope further alone. Your parents’ support can help you overcome the hardship.
The worst-case scenario is not having anyone to help you with unexpected slumps. You’d be lucky if you gain some inheritance, which could see you through challenging times ahead.
Retirement is a pivotal financial moment in everyone’s life. No matter how much you stashed away for retirement, the chances are that you might outlive it. You can live longer than you anticipated or overspend and dry up your savings earlier than planned. Either way, you can prepare by prioritizing retirement funds early in life. The younger you begin to contribute to your 401(k) or IRA, the better.
Financial advisors encourage their clients to start saving in their 20s and 30s if they want to retire early. As a result, you can set aside enough during your peak earning years. Even if you neglect retirement income, it’s never too late to save when you’re older. Lagging behind your peers is always better than giving up on saving for retirement.
Hopefully, you’ll have already set aside a significant sum for your golden years by the time you retire. Still, you have many critical decisions to make. One of your options includes drawing cash, staying invested and taking an income. Or you can buy an annuity. Sometimes, it’s worth getting financial advice about how to make the most out of your pension pot and avoid being subject to tax charges.
Receiving An Inheritance Or Settlement
If you inherit some money from a family member, it can be tricky to channel the sudden inflow in the right direction. If you have a debt to service, you may decide to use the cash to get on the positive side of the balance. Or you might pay a portion of your mortgage or invest towards your retirement account.
Your ultimate decision will depend on your immediate circumstances. Not pushing yourself too hard at the onset is a wise step to take. This is because losing a loved one can cloud your judgement. Hence, think about putting the money in a savings account and call the shots later.
Last, dealing with a lump sum from a settlement process can be challenging. Before anything, you need to focus on minimizing the taxes. Also, if you inherit a retirement account like a 401(k), think about benefiting from rollover options and tax-efficient strategies.
Tips To Prepare For A Financial Crisis
The thought of going through an economic dead-end in case of a job loss, illness, or pandemic can keep anyone awake at night. Yet, the prospect of something happening beyond your control becomes less scary if you have prepared well. Below are eight strategies on how to deal with a major cash crisis.
Start Saving Early
There’s no such thing as starting too early or too late when it comes to saving. Overall, the sooner you begin setting aside, the better off you’ll likely be during your golden years. Experts suggest you maximize savings during peak earning years.
One of the most successful methods is compounding or reinvesting earnings over time. The more profits you reinvest, the greater the investment, and the larger the nest egg.
Another way to save regularly is to set up multiple savings accounts for different purposes. Next, you’ll have to add these savings accounts to your direct deposit that contributes to your pension plan. This tactic will help you stay on track within the timeframe you set to accomplish long-term financial goals.
Minimize Your Bills
The sooner you start revising your monthly bills and cutting out unnecessary spending, the better. Getting your recurring expenses as low as possible in the present means you’ll have less difficulty paying them when funds are tight.
Check your statement to see where you might be throwing money down the drain. For example, you may realize you have been paying an excessive monthly fee for your checking account. Or maybe you’re wasting $40 a month for a landline you rarely use. Shop around and switch to lower rate utilities and phone plans.
Moreover, are you in the habit of letting the air conditioner run when you’re outside or leaving lights you aren’t using on? Are you still putting off the installation of eco-efficient bulbs? In all these cases, you can trim the utility bills and cut monthly costs.
Finally, see whether you can find lower insurance rates. Or, try to land a discount on regular rates if you’re a loyal customer. Go a step further and cancel some insurance types you never get the chance to benefit from.
Make A Budget And Stick To It
We all have anticipated financial events such as medical procedures, home improvements, celebrations, and vacations. These expenses can hurt your billfold, but you can ensure funding with less worry if you build solid money-saving habits.
Indeed, a well-planned budget can help you deal with anticipated expenses. It’s best to make a list of the events you’re planning throughout the year and do your best to estimate the ultimate cost. If you have no prior experience in some things, do thorough research. In case you have done something before, look at your history to predict future expenses.
Once you get the numbers, set incremental savings targets. This way, you can track your progress and adjust priorities. The method is ideal for big purchases, planned vacations or other sizable expenses on the horizon. It’s also advisable to leave some room in savings for the surprise element.
Though budgets are usually month-to-month templates, you can always plan further ahead. Having long-term goals is particularly useful when your income is uncertain. By preparing for the expected, you spare yourself from financial disaster when unexpected life changes come along.
Build An Emergency Fund
Focus on maintaining a fund for emergency purposes. These savings will help you pay for sudden expenses such as car repairs or high bills at the dentist. The fund can also come in handy if you suffer from an illness or injury or become unemployed.
Although many suggest saving three to six months’ worth of living expenses, the lower limit may not always be enough. Indeed, this amount may fail at covering a high cost or job loss. Due to the uncertain financial present, you should try saving at least half a year’s worth of living expenses. As a result, you can relax with the thought that your emergency backup is sufficient.
Remember that establishing a fallback budget is an ongoing mission. The odds are that as soon as your emergency fund becomes solid, you will need the money for something. Instead of feeling discouraged, be proud that you prepared on time and rebuild it again.
Pay Down Your Debt
The interest and fees you’re paying for your credit card debt can take up a significant portion of your monthly budget. Hence, you will open up some room to start building a better nest egg by paying down any outstanding debt you may have. Once you become debt-free, your money can go toward more important things, such as your emergency fund.
Even if you can’t do so without your credit cards, keep balances low. High outstanding debt can negatively affect your DTI ratio and hurt your credit score.
It’s also best to pay off debt rather than consolidating. By paying down revolving credit, you’ll improve your FICO score and qualify for better loan rates and terms in the future. We suggest you use the debt snowball method. In short, repay the highest interest cards first and make minimum payments on the other accounts. Once repaid, relocate the money to the next debt and so on until nothing remains.
It’s easy to ignore all the inevitable changes that life has in stock for you. That’s, however, a costly mistake that can just make things worse when a financial crisis strikes.
Review Your Insurance Coverage
When it comes to insurance, you can make some noticeable changes to lower your monthly bills. Many of you have probably too much insurance and can reduce it without impacting your safety adversely. Or you can get the same coverage from another provider at a better rate.
Having extensive insurance coverage can help you overcome a severe crisis you didn’t expect. So, it’s worth arranging for the coverage you need and not just the bare minimum. For example, a disability policy can be a real life-saver if you get ill or injured and cannot work. Umbrella policies, on the other hand, provide coverage where other policies fall short.
Identify Needs Versus Wants
Unless you have money to burn, be mindful of the difference between what you need and want. Needs are things you depend on to survive, including food, shelter, clothes, transportation, and healthcare. Conversely, wants are things you wish to have, but your survival doesn’t thrive on them. Though the line often gets blurred, knowing what is what will help you make better spending choices.
Before purchasing, rationalize whether the item is something you need. For instance, you need a vehicle to commute and take the kids to school. However, you want a luxury edition with a price twice higher than that of a regular car. The difference in price between a more economical vehicle and a luxury one is money you don’t have to spend.
Needs are the top priority in your budget. After you satisfy the needs, you can allocate some discretionary income toward wants. Again, if you have money left after paying for the needs, you don’t have to spend it all.
Find Better Credit Line Deals
Carrying a balance isn’t easy to handle, but you can transfer it to another card at a lower rate. Less monthly interest can help you pay off debt faster and have more money left in your wallet. Before switching, check whether the balance transfer fee exceeds your current interest rate.
We suggest looking for a card with a low or 0% introductory APR. Once you have it, pay off your debt during the grace period to save on interest. Also, some companies may lower your monthly interest rate to keep you as a customer. For them, it’s cheaper to retain existing customers than to recruit new ones.
Personal saving rules can prove excellent tools to achieve financial success and independence. To this end, it’s vital to consider the big picture and develop money-saving habits that help you make better monetary choices. It can be impossible to remain financially healthy without keeping up with your overall goals, particularly when unexpected life changes strike.
Have you ever experienced an unforeseen event that required a significant portion of your finances? How did you overcome the situation? Share your insight with our readers in the comments below, and sign up for our newsletter for savvy saving tips.
How do you prepare for unexpected financial events?
Start by building up an emergency fund for money crises. Then, revise your insurance and drop policies you don’t need or bundle them. It’s also essential to have a thorough plan for natural disasters. Finally, get rid of credit card debt and other revolving credit you may have.
How can I be financially prepared?
Focus on maximizing your liquid savings and setting up a feasible budget. Work on reducing monthly bills and cutting down on unnecessary subscriptions. Take stock of your non-cash assets and enhance their value by making wise investments. Last, repay any small loans or consolidate debt with a 0% APR card.
How do you manage your finances?
First, consider your current financial situation and check your credit report. Learn to differentiate between needs and wants and leave some room for savings. Next, set short and long-term priorities and budget goals. To this end, you must create and stick to a detailed budget.
How can financial health be improved?
Take time to crunch the numbers and ensure you live within your means. Avoid high-interest consumer loans that drag your finances down. Also, put a stop to overspending and automatize savings and bill payments. Finally, maintain an emergency fund to tap into in times of crisis.