In our blogs, we focus a lot on the topic of preparing for retirement. Although it is a top priority, there are other aspects to building a healthy financial life that also deserve some consideration. Plus, all of these things are interrelated anyway.
For example, a financial setback or emergency could actually impact your ability to prepare for retirement. You might be tempted to take on excessive debts, or borrow from your retirement account (always a bad idea). So, since all parts of your financial life come together to help you build a more secure future, we feel it’s also important to tackle the topic of preparing for a financial emergency.
A recent report by the Federal Reserve uncovered some illuminating facts about financial health in America. For example, 18 percent of households experienced a financial crisis in 2015, for the following reported reasons:
- Health emergencies (36 percent)
- Lost jobs (25 percent)
- Loss of spouse’s job (13 percent)
- Reduction of work hours or pay (18 percent)
- Reduction of spouse’s work hours or pay (12 percent)
None of those reasons are unusual, and it’s easy to see how one or more of them could trigger a financial setback. The point we’re making, though, is that all of these things are for the most part unavoidable. There are steps you can take to stay healthy, but nothing is ever guaranteed. Likewise, good job performance doesn’t always guarantee that your company won’t downsize, move, of go out of business.
The alarming part of the study was not the fact that a financial setback can happen, but the lack of preparedness prevalent in many households. Researchers asked study participants how they would cope with an unexpected expense of 400 dollars, and about half of respondents said they could handle it. However, 47 percent said they would be forced to take a loan or sell personal items. That percentage would likely increase dramatically, as the “price” of the financial emergency rises.
Could you cope with a financial emergency? How much could you handle? These are good questions to ask yourself, so that you can become better prepared to cope with anything life throws at you. Then, take these four steps:
- Get out of debt
- Analyze your spending habits
- Cut out unnecessary expenses, to free up more cash in your monthly budget
- Put that extra cash, along with any extra that comes your way (like your tax refund) into an emergency fund
If you have any questions about preparing for emergencies, adjusting your budget, or saving for the future, give us a call. We can help guide you in all matters pertaining to financial planning, so that a small setback hopefully won’t impact your retirement.