To help you prepare for the next sudden financial crisis, here are 5 steps you can take to shock-proof your finances.
1. Build a Budget
You need a budget so you know how much money you have coming in and what expenses you have to cover. If you’ve never budgeted before, a simple breakdown you can follow is the 50/30/20 rule. 50% of your income should go toward essential expenses, like your mortgage, utilities, food, car, etc. 30% is allocated to nonessentials, think eating out, shopping, entertainment. And 20% of your income goes to savings like your retirement accounts, emergency fund, and paying down any outstanding debt.
2. Checkmark Nonessentials
Once you’ve built your budget, grab a red marker or open a document on your computer or phone and checkoff all your non-essential expenses that could go if you needed to tighten your belt. The point is have a list of these nonessentials ready so when the day comes, you can easily lighten the load.
3. Build a Rainy Day Fund
A rainy day fund is different than your emergency fund. Your emergency fund is meant for catastrophes like losing your job, divorce, or medical or mental disability that affect your cash flow. Rainy day funds are for urgent but less-catastrophic needs, like car and home repairs, medical and vet bills, or short-notice travel to be with a sick relative. Open a sub-savings account and set up auto-transfers on a weekly or monthly basis to start funding your rainy day savings. How much should you save? For most homeowners, anywhere between $3,000-$5,000 is enough. Renters can probably get away with $1,500-$2,000.
4. Slash Your Debt
Even if there’s no financial crisis looming, you should be paying down your debt regularly. Pay your debt off from highest to lowest interest rate first. You may even be able to consolidate your debt into a lower-rate, sometimes 0% credit card or loan.
5. Prime Your Credit
The best time to get approved for a line of credit is before you need one. If you think you might need to fall back on a line of credit, then get approved for one now. Also ask your credit card provider to raise your credit limit. This will do two things: one, help you lower the amount of available credit you use (which will lift your credit score); two, give you more credit at your disposal in a pinch.
Sven Franssen