How To Prepare For Unexpected Financial Emergencies In 2024

A recent BBC article spoke to the importance of financial preparedness and noted a strategy borrowed from the Chinese.

Saving enough to survive redundancy or pay for emergency repairs is not difficult. It requires only some planning and a few small changes.

Anyone can become a smarter saver, and this includes people trying to provide for their loved ones after their own deaths.

Preparing for financial emergencies is crucial to ensure financial stability during unexpected events. Here are some key points to consider.

Build an Emergency Fund

One of the most important steps is to build an emergency fund. Financial experts recommend saving enough to cover 3-6 months’ living expenses. This fund can help cover costs like job loss, medical emergencies, or major home/car repairs.

• Start small if needed. Even saving £1,000 can provide a buffer for minor emergencies.
• Keep the emergency fund in an easily accessible savings account.

Prioritise Paying Off High-Interest Debt

Before building an emergency fund, paying off high-interest debt like credit cards, payday loans, or unauthorised overdrafts is advisable. This can save money on interest charges in the long run.

Maintain Adequate Insurance Coverage

Suitable insurance policies can protect against financial emergencies. Depending on individual circumstances, this includes home, car, health, and life insurance.

Create an Emergency Plan

Develop an emergency plan that outlines actions to take in case of job loss, illness, or other emergencies. This plan should include alternative living arrangements, emergency contacts, and essential expenses.

Utilise Government Resources

The government provides resources to help individuals prepare for emergencies, such as the Met Office weather warnings, Environment Agency flood alerts, and guidance on the GOV.UK website.

By following these steps, people can better prepare for financial emergencies and mitigate the potential impact on their financial well-being.

Cultural Savings Rates

Begin by examining the culture’s financial expectations. While residents of the U.S. save only 3.2 percent of their income according to the U.S. Bureau of Economic Analysis, the International Monetary Fund reports that China has a 54.3 percent national savings rate.

According to a February 2023 article in the Mail Online, most Britons save only enough for the first seven years of retirement. Many of them may not have enough money saved to pay emergency expenses in the present.

Increase Savings Before a Crisis Hits

Financial experts recommend saving enough to cover three to six months of living expenses. Entrepreneurs should save enough to survive for 12 months without additional income.

To determine how much your family requires, calculate post-tax income and total average monthly expenses, subtract ten percent, and multiply the result by the number of months for which the money is needed.

Every year, more expenses move from the discretionary to the essential column. Internet service and mobile phone contracts are two examples. Many parents are unwilling to force their children to sacrifice sporting or other activities just because these come at a price. However, giving up dining out and weekly salon appointments is easy.

People with enough discretionary cash for an aggressive savings approach may be able to amass an emergency fund within a year. However, most people face credit card, mortgage, and car payments that make it more difficult to save money each month.

Determining a reasonable savings figure and establishing automatic transfers into a savings account will ensure that the money is not missed. Savings should not be linked to a debit card because doing so makes it easier to access the money.

Revaluate Frequently

Review the budget every six months to determine whether the amount of regular savings can be increased. Identify expenses that can be reduced or eliminated and place that money in the savings account. Review television and other provider bills to determine whether services can be decreased without negative effects.

Establish savings targets and track progress toward these goals. Leave the money where it is and save it separately for a vacation or an expensive purchase.

Saving for Future Generations

People who have spouses and dependents should focus on more than themselves. They also need to save for beneficiaries who outlive them. Making regular deposits to a savings account is one way to do this, but low interest rates make alternatives more appealing.

Allocating some discretionary income to purchasing an insurance policy can be a much more worthwhile investment. A term or whole of life policy with a payout that allows beneficiaries to live comfortably is a smart way to save for these future generations.

Research References:

[1] https://themoneycharity.org.uk/advice-information/financial-emergencies/
[2] https://www.uttlesford.gov.uk/article/3234/Preparing-for-emergencies
[3] https://www.moneyhelper.org.uk/en/savings/types-of-savings/emergency-savings-how-much-is-enough
[4] https://prepare.campaign.gov.uk
[5] https://www.gov.uk/guidance/preparation-and-planning-for-emergencies-the-capabilities-programme