According to a 2015 Federal Reserve Report, 40% of Americans are unable to pay a $400 emergency bill. The amount seems small when you consider the fact that the average annual household income in America was $57,230 in 2015. Even today, most people cannot afford to pay an emergency expense such as a hospital bill or a utility bill. Whether you have found yourself in such a scenario or not, it is always good to know how you can deal with it. The following are five ways that you can use to prepare for a financial emergency.
Before you decide on the amount of money that you want to put in an emergency account, ask yourself whether you would be able to survive for six months, if you lost your job today. If the answer to that question is no, you should start putting more money aside for emergencies. Additionally, ensure that you keep this money in a savings account so that you can maintain your liquidity during such scenarios.
If you already have an emergency fund, but you are not sure about how you can increase that amount. There are two methods that you can use:
For most people, it can be overwhelming to have all their bills due on the same day. If you are one of those people, you often feel rushed and unable to save anything after you have cleared everything.
If this is the case, call your utility provider and ask them if they can push the due dates to ease the financial pressure, for example, the deadline for the water bill payment could be pushed to a week earlier or later after the gas bill. Since the timing of bills often predicts people's spending habits, such a move can help you save more money for financial emergencies.
One of the most effective ways to prepare for a financial emergency is to minimize your monthly expenses. Find out the purchases that you can do without and get rid of them, for example, cancel your gym subscription if you walk to work everyday. Additionally, ensure that you clear all your student loans and other outstanding debt on time.
It is easier to save for a financial emergency if you do not have any other financial obligations. Since you cannot predict the exact date of an emergency, you should not postpone your debt repayments. They should always be your first priority. Another way to minimize your expenses is to avoid unplanned purchases. You may have heard this before, but it is always good to have a list of the goods you intend to buy beforehand.
Clearing your debt on time helps you to maintain a perfect credit score. That way, you can take advantage of loan facilities and borrow anytime you need money for a minor emergency. It is also advisable that you only take short term loans for urgent situations because they are manageable.
Additionally, if you ever borrow money from a friend or a work colleague, ensure that you pay them on time to gain their trust. Such people can come in handy during emergencies. However, remember that your colleagues also have financial needs and as such, they may be unable to assist you during emergencies; therefore, you should not entirely depend on this strategy.
If you have invested in the stock market, you know about the uncertainty of the market and how prices can shift at anytime. To shield yourself from such shocks, you may have decided to buy stocks from different industries.
However, diversity should not be based on stocks alone, you ought to consider buying bonds, derivatives, and putting some of your money in cash businesses, for example, a grocery store or a delivery firm. By using this strategy, you avoid selling your stocks at a loss just to get fast cash for emergencies.
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