How to Prepare Your Finances for Unexpected Life Changes

Unexpected events are a part of life, and while you can’t plan for everything, there are steps you can take to help prepare your finances for unexpected life changes.

Whether good or bad, these unexpected life changes carry daunting monetary challenges. How do you get ready if life threw you a financial curveball, like an unexpected issue with your home, medical expense, or unemployment?

Here are a few steps you can take now.

Know Your Current Financial Status

My family recently celebrated my grandmother’s 90th birthday and even though that was an awesome achievement it got me thinking about death and putting my affairs in order.  I went home after the celebration and did a financial checkup.

It was important for me to know where I am at and what I needed to do to get my finances better organized. I took note of all my account numbers and where they were held, current balance and payment amounts, and how to access the accounts i.e., passwords, user IDs, website address, etc. This includes bank, retirement, and insurance accounts.

Build an Emergency Fund

Another important way to be prepared for an unexpected life event is to have an emergency fund that can help you weather the financial impacts of an unexpected event. Your emergency fund should contain anywhere from 3 to 12 months of living expenses. This depends on if you’re single, married, two-income, or in a one-income household.

Set Clear Financial Goals

A great way to reduce the fear of uncertainty is to have a plan. If you don’t already have a financial plan in place, consider outlining one for yourself or with your spouse if you’re married.

Having a solid financial goal is having a budget, investments, retirement planning, and working toward paying off debts. Make sure to approach your finances with a clear plan of where you are now, and where you want to be. You’ll have more confidence to adjust to changes and uncertainties when they arise if you’re grounded in your financial realities right now.

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Create and Stick to a Budget

To prepare financially for the unexpected, create a budget and stick to it. A budget can be a safety net and a great guide for your money.

If you clearly outline what you’ll spend money on each month with the income you have to work with, you don’t have to worry about coming up short when the unexpected happens. In this way, a budget can act as a safety device to prevent you from spending your money as soon it deposits into your account. It can also guide you if the unexpected does happen and you need to make changes or adjustments to what you’re spending every month.

Consolidate Your Debt

If you have multiple debt accounts such as loans and credit cards, consider consolidating your debt. This means combining your various debts into one simplified monthly payment. You may be able to lower your cost of credit by consolidating your debt through a home equity loan or home equity line of credit – but it’s vital to keep in mind that these are secured loans that could even require you to put up your home as collateral.

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Obtain Life Insurance

It is important that you have adequate life insurance to provide for your family. This will benefit your spouse if you are married and will provide for any children you have. When your family depends primarily on your income to pay debts, life insurance is doubly important.

The value of the policy’s death benefit should provide enough money for your beneficiary to pay off debts after you pass away. If you have children, you should get enough that it can help cover the cost of their education. It is vital that you have life insurance coverage if you have children.

Save for Retirement

Why would saving for retirement be one of the recommendations for preparing for an unexpected financial emergency? Think about how many times you’ve heard of people in their late fifties or early sixties losing their jobs and not being able to find another one. 

Sometimes retirement isn’t your choice. Start saving early and save as much as possible in your retirement plan. Work it into your budget! Retirement may arrive sooner than you think.

Manage Retirement Cash flow

Unexpected life changes happen in retirement as well. Recessions, changes in the stock markets, and unexpected financial emergencies can occur in retirement. Accept that fact and prepare for it. Have a retirement cash flow plan in place.

Managing your investment portfolio is imperative. It requires walking a fine line of achieving a return that will outpace inflation and provide enough income for retirement versus being too aggressive, resulting in a significant loss. It’s not just about how much you’re comfortable taking. It’s also about how much risk you can afford to take.

RELATED: How to Save Money for Retirement as a Freelancer

Estate Planning Documents 

Regardless of the size of your estate, creating a plan allows you to make important decisions about the future and provide documented guidance to your loved ones in the event of your death. Without an estate plan, attorneys or the government can decide how to distribute your assets or care for your loved ones

There are a few essential documents you will have to make sure are in place: 

  • Beneficiaries: Make sure you have the appropriate beneficiary for all retirement accounts. Spouse primary, children contingent.
  • Last will and testament: Having a will is vital if you want to pass assets to heirs or charities. You can also spell out funeral arrangements. Once you have a will in place, make sure you update it every five years, or when you have a significant life change,
  • A living will: Also called an advanced medical directive, this document outlines your wishes should you need to be resuscitated. 

You should have these items, regardless of your age or wealth. Also, please make sure people know where the documents are located. It really helps your heirs during an already difficult time.

Closing

Completing the tasks listed above will give you peace of mind when unexpected life changes occur. By putting these things in place, you would have created your very own financial emergency plan that will reduce the risk and worry that comes with uncertainty.