A Guide to Managing Unexpected Expenses
The world is full of surprises. Even though it is impossible to truly prepare for everything, detailed financial planning and having an emergency fund to help you weather unexpected costs are keys to reducing stress and building financial resilience. If you’re wondering how you can plan for unexpected expenses, we have a few tips to help you prepare.
What are unexpected expenses?
Unexpected expenses typically fall into two different categories: unforeseen costs and lifestyle changes.
- Unforeseen costs cut into any savings you may have kept: Maybe your car or house needs some sudden repairs, or you have serious medical expenses or costs related to a natural disaster.
- Lifestyle changes may not always cut into your bank account immediately, but they can dramatically affect your budget—things like a change of employment status, suffering an injury, having a child or getting a divorce.
For people who have not prepared an emergency fund, these types of expenses can be devastating, both on your bank account and on your stress level. So, let’s talk about how you can set yourself up to best handle the unexpected.
What is an emergency fund?
Typically, an emergency fund is an account, separate from your normal checking, savings and investment accounts, where you keep enough money to help get you through an emergency. Ideally, your emergency fund is money that will just sit there, untouched—perfect for a low-risk account with a decent rate of return.
There’s one big question you might ask yourself: “How much emergency fund money should I have?” Most financial experts recommend keeping enough money in an emergency fund to help pay your normal expenses for 3–6 months. If you were to suddenly lose your job or if you had to cover a catastrophic home or medical expense, that amount would hopefully be enough to help ease the burden.
How do I create an emergency fund?
The key to creating an emergency fund is to understand your monthly expenses and take-home pay, then create a budget to start saving additional money each month. As a rule of thumb, you can treat emergency fund money as already spent. Try cutting any extra expenses until your fund has accumulated enough to where you want it. For example, cut a streaming service you don’t often use or eliminate extra money spent on “nice-to-haves” by cooking or making your daily coffee at home. Start with little steps, like putting away a small percentage of each paycheck into a separate bank account. Set up an automatic deposit on a recurring basis if you get paid on a regular schedule to reduce the roadblocks involved.
Another option is to set up your emergency savings in a high-yield savings account, which typically earns higher interest rates than a standard savings account; investment accounts can be risky, and you want your emergency fund to be accessible if you need it quickly. However, we recommend not putting it into an account that has a debit card attached—you don’t want your emergency fund to be too easy to spend from. Finally, set achievable goals for yourself—micro-milestones like “My emergency fund is the size of a regular paycheck” or “My emergency fund is enough to cover a month on its own” are reasons to have a little celebration!
Can life insurance help in an emergency?
If you’re wondering how you can plan for unexpected expenses beyond an emergency fund, that’s where some life insurance options from Gerber Life can potentially offer help. It can be impossible to plan for everything, but products like our Term Life and Accidental Death & Dismemberment options may help ease your loved ones’ financial burden in the event of death or loss of income. Whole Life plans can also earn cash value over time (as long as premiums are paid) that can be borrowed against1 or received when you cash in the policy. This makes Whole Life plans a great way to supplement your emergency fund should the unexpected arise. Check out our quick overview on just a few of the benefits of life insurance.
How can I prepare my long-term finances?
The key to getting your finances in order is twofold—you need to create a detailed budget, and you need to stick to it. The second half of that is definitely the more difficult aspect. When you’re creating a budget, you need to be honest about your spending. Even if you know you spend too much money on X, Y or Z, make sure you incorporate it into your planning—or, better yet, work to change your spending habits.
Creating a budget can be a huge help to getting your spending under control, as it really helps to visualize how much you spend each week or month on certain things like dining out instead of eating at home.
Sticking to your budget also helps prepare you for a more independent financial future. Once you get safety net savings—like an emergency fund and life insurance—into place, you’ll be able to budget more effectively for necessary or fun expenses.
Still need some help with budgeting tips? Want to learn more about the life insurance options offered by Gerber Life? Call us today at 1-800-704-2180 to speak with one of our dedicated representatives, or you can get a free quote online in just minutes.
1Loan interest rate is 8% and loans may impact cash value and death benefit.
