According to a study back in 2017, almost one in three Australian families are financially stressed. Financial stress can cause emotional damage to an individual. A person facing financial pressure can feel frustrated and hopeless. The last thing they would want to have is a financial emergency on top of it all. Financial crises can come in the form of an unexpected medical expense, broken down car, or even sudden vet bills. Keep in mind that there are options that you can consider, such as setting up an emergency fund beforehand or taking out a personal loan in Australia.
Definition of Financial Emergency
Before you go around planning how to prepare for a financial emergency, you need to know what it is first. If you are struggling with your current income or if you already have an existing debt like mortgage repayments, financial emergencies can come in the form of a short period of unemployment or a considerable unexpected expense. It is basically anything that will leave your bank account holding on for dear life for an extended period of time, such as:
- Unexpected unemployment
- Medical expenses
- Unexpected long term costs (increased mortgage repayments, etc.)
- Other emergencies, like damages to your home, vehicle or livelihood
These events will have less impact if you are financially prepared. You can avoid incurring massive debt, at most, you will only need a small personal loan in Australia.
How to Prepare for a Financial Emergency
You know what they say, prevention is better than cure, but then there is really no telling when the next financial emergency is going to hit you. You can’t really prevent something that you don’t see coming, so the next best thing is to be prepared. Here is how you can make an emergency fund a part of your family budget:
1. Have a separate account from your personal savings bank accounts.
It is hard to monitor both your emergency savings fund and your own savings when they are in the same account. You simply just would not know where to draw the line. Plus, an emergency fund is not merely a saving, it is a safety net. It will protect you in the event of a financial emergency. So they absolutely need to be separate.
2. Set a goal for your emergency fund.
The rule of thumb when saving up for an emergency fund is that it should at least be around three months worth of pay. This is indeed a lot of money just to be sitting around, but it makes sense if you factor in that the average duration of unemployment for Australian jobseekers is around two years. So, you need to make sure that you have enough funds to cover your living expenses at least long enough to take advantage of social safety nets or unemployment insurance. You can always check out what offers there are for personal loans in Australia, but of course, having your own cash is still the best-case scenario.
But of course, if you can save up more than three months worth of pay, then you will be more secured. You can take it slow and steady by allocating a small amount of each week’s salary. This way, you will be able to save up without feeling any significant changes in your monthly budget.
Are There Other Ways to Plan for Financial Emergencies?
As mentioned previously, the more your emergency fund contains, the more secure you will be during times of emergency. So you must keep your emergency funds topped up. If you can, then you should increase your emergency fund up to six months worth of living expenses or more.
There is also a matter of inflation that you may want to consider when saving up. You can prepare for the inevitable effects of inflation by splitting your emergency fund into two elements. You can put one portion in a high-interest saver, and the other part in a readily available higher interest managed fund.
What If It’s Too Late?
What if you don’t have the time to prepare? What if you are facing a financial emergency right now? Unexpected financial crises can easily make someone feel helpless. After all, how can you deal with something that hit you by surprise? Having a sudden and unwelcome change in your financial situation is incredibly stressful. However, stressing out will not pay the bills, and it will definitely not put food on the table.
Here are some steps that you can take to deal with an unexpected financial emergency:
1. Evaluate your situation.
It may be too much to take in, so sit down and take a moment to let it all sink in. A lot of negative thoughts will enter your mind when the news hits, but panicking will not help you solve anything. So, calmly evaluate your situation.
Try to determine the root cause of this financial emergency. Is it because of unemployment? Do you have more expenses than you can afford? Taking medicine for the symptoms and not the actual disease only guarantees that it will happen again. Figure out what the main reason for the crisis is so that you can attack it at the roots.
2. Know how to prioritise expenses.
You have to admit that not all your expenses are a necessity. Some bills are more important than others. For example, your bill for electricity is much more important than your Netflix subscription bill. Keep in mind that the most important bills are the ones related to your food and shelter.
Think of it this way, it is definitely inconvenient for your internet services to be cut due to late payments, but there are many coffee shops that you can go to for free wifi. However, if you get thrown out of your place for late mortgage or rent repayments, you would have a hard time looking for a new place to stay in.
As for food, your productivity will swerve while you are on an empty stomach. And if you consistently skip meals, you may be heading for another financial due to medical bills.
After you’ve established which bills should be on the top of your priority list, then you can work on cutting back on your budget. Maybe you can live without your premium movie channels or streaming services until you can get back on your feet. And you don’t really need to eat out every day—saving even just $20 can go a long way.
3. Negotiate with your lenders.
If you have existing debts, then you may want to call your lender as soon as you can. Letting them know that you are in a tight spot financially will work in your best interest. You would be surprised how willing a lender can be in helping you make your payments. At the end of the day, they would rather get paid some amount than get paid nothing at all. Depending on your lender, they may give you a lower interest rate or extend your terms so that you can make your payments on time.
Speaking with your lender as soon as possible is important because they won’t be as willing to work with you when you contact them after missing several payments. Make sure that you get in touch with your lender before you get behind on your payments.
4. Find ways to earn extra money.
Having an emergency fund would help in this situation. However, this isn’t always a realistic expectation. So you need to look for alternatives.
There are a lot of finance companies and lenders in the business, so you will have no problem applying for a personal loan in Australia. You can also use your credit card in the meantime. However, you need to be careful when using your credit card for your expenses as it may make your problems worse if you don’t keep your expenses in check.
There are different kinds of personal loans in Australia. Choosing the right loan to apply for can give you quick access to cash. It can be an excellent short term solution to your problem. However, you need to put some thought on how much you need to borrow and if you can afford the monthly repayments. Borrowing too much money can lead to a downward spiral that is nearly impossible to recover from. So if you are going to borrow money, borrow wisely.
You can try borrowing some money from friends and family. However, this is not highly recommended as debts don’t mix well with relationships. If someone does trust you enough to lend you money, make sure that you pay them as soon as you can. You don’t want to lose a friend on top of having a financial crisis.
One more option is checking your investments or retirement accounts. However, keep in mind that withdrawing money from your retirement account is not highly recommended. Doing so can put your retirement security at risk.
5. Check and take advantage of any available assistance.
The government has social programs that can help people get through unemployment and other sudden financial emergencies. Your taxes fund these programs, so make sure that you take advantage of them when a financial issue strikes.
Bottomline
Preparing for the bad days can help you avoid being in a very stressful position in the future. You should familiarise yourself with your income, expenses and investments so that you can make any necessary adjustments to ensure that you can avoid financial issues. Of course, when the emergency is already happening, you have no choice but to deal with it. Just keep calm and evaluate what your next action should be; do you need to cut some expenses or look for a personal loan in Australia? Make careful financial decisions until you are back in a stable place.
The opinions expressed in the Blog are for general informational and entertainment purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.