Emergencies can take many forms. But whether it’s a natural disaster or an unexpected change in your income or living situation, planning for these unexpected expenses is key to your financial stability.
A financial emergency may include a sudden loss of income or any number of large or unexpected expenses, such as storm damage, medical bills or car repairs. Though it is impossible to be prepared for every disaster scenario, you can build resilience by creating an emergency savings fund.
Here are some helpful tips that will provide financial stability for you and your family when you need it the most.
Start Saving to Build Your Emergency Fund
Create an emergency fund with a goal of saving enough money to have three to six months of coverage for regular expenses set aside. You should keep your emergency funds separate from a regular savings account, and you shouldn’t touch your emergency savings unless there’s an extreme need.
Putting several months of expenses into a reserve account can be difficult to achieve, especially during difficult times. Do the absolute best you can to build an emergency fund first, before saving for other items that are of lesser importance.
Create an Emergency Budget
Before you set a savings goal, you should spend some time creating an emergency budget, or crisis budget, to gauge how much you need to save. Having an emergency budget allows you to react quickly in the event of an emergency. Plus, households that have emergency budgets in place tend to be better prepared to face disaster.
If you haven’t established an emergency budget, develop one similar to your regular household budget. If you don’t have a regular household budget, consider making one. For your emergency budget:
- Look at your existing budget and identify ways to trim costs, if you can.
- Test your emergency budget for several months to see if it’s practical for you to meet regular expenses.
Take Stock of Insurance Coverage and Other Resources
Whether you rent or own, having adequate homeowners or renters insurance will ensure that you're protected against damages from the unexpected. It is good to familiarize yourself with your coverage so you understand what is or is not covered by your insurance policy — you may even consider additional coverages if you live in an area prone to natural disasters.
For financial emergencies, like a sudden change of income or large unplanned expenses, there are other resources that can help you stay in your home if you are in danger of missing rent or mortgage payments. Freddie Mac’s Borrower Help Centers and Renter Resource Organizations can help find solutions that fit your specific needs.
For more information about financial preparedness, check out the free CreditSmart® Homebuyer U online course — also available in Spanish — that will empower you to make educated decisions throughout your home journey.