Q: I feel horrible for the people of Fort McMurray and can’t even begin to imagine what they are going through. I also wonder if they will ever fully recover from this tragedy. I live on Vancouver Island and one day we may face a major crisis as we are in the earthquake zone. My friends are all talking about the need to put a plan in place and set aside some money to get through a crisis but so far it’s just talk. I want to do more than just talk about this and worry. How do I go about putting a plan in place to get me through a crisis? ~Trina
A: All of us in Canada are worried for the people and families who call Fort McMurray home. It’s also great to see the generosity of Canadians lending a hand to help others in their time of need.
I think we need to recognize that a crisis can come in different forms and levels of severity, and the best thing we can do is put a plan in place to manage to the best of our ability. Having a well thought out emergency plan, which includes an emergency savings fund, will spur you into action and replace the worry you are feeling today.
Unplanned Life Events
The majority of unplanned life events like a job loss, injury or illness, tend to be for a period of 6 months or less. Those events lasting for a longer period of time are typically managed by having the proper insurance in place. Experts also advise that with a major catastrophe the first 72 hours are critical. During that time you may need to be self-sufficient and have your own food, water and resources on hand until help arrives.
Preparing for the First 72 Hours
Public Safety Canada has developed an emergency preparedness guide in collaboration with a number of different relief agencies. The guide addresses the first 72 hours and how to make a plan and prepare an emergency kit. This will help you get ready for the worst case scenario and is an important part of your overall plan. Then, over and above what you need to get through the first 72 hours, are the financial aspects of surviving a crisis.
Here are the financial components you need to be aware of when planning how best to manage through a financial crisis:
Managing Financially Through an Unexpected Life Event – Emergency Savings
Determining the amount of financial resources you will need to deal with an unexpected life event or financial emergency is an important first step. Based upon the experiences of our clients, we recommend having the equivalent of a minimum of 3 and preferably 6 months of living expenses set aside in savings. If you are a home owner and have a mortgage our recommendation would be to set your savings goal to the equivalent of 6 months of living expenses. The last thing you would want to be faced with in an emergency is the thought of selling your home out of necessity.
Break Your Goal Down Into Smaller Steps
Saving the equivalent of 6 months of living expenses may seem impossible at first. I would instead encourage you to break this amount down into a realistic financial goal that you can work towards each month. However, to know how much you need to save, start by identifying what your monthly expenses are.
Determine What Your Expenses Are
You need to know what your true expenses are in order to set an accurate savings goal. If you’re not using a household spending plan or budget right now, I would encourage you to start outlining your routine expenses and spending, bills, debt payments, and irregular or seasonal expenses right away. Keep in mind that during a financial emergency you’ll likely scale back on discretionary expenses and savings for other goals which will reduce the overall amount of savings you’ll require.
Set a Budget and Reduce Your Spending
Budgets help us keep our spending in line with our income and achieve our financial goals. The money you allocate for your emergency fund will come from scaling back current expenses in your budget, finding ways to increase your income or doing a combination of both. Once you have identified how much you can afford to allocate towards your emergency savings fund each month you can then determine how long it will take you to save up the equivalent of one month of living expenses. Once the first month of savings is achieved you can turn your focus to the second month and keep moving forward until your goal is achieved.
Open a Separate Bank Account – Set Your Savings on Auto-Pilot
If you’re serious about protecting yourself financially against an emergency our best advice is to open a separate savings account that isn’t attached to your debit card. When you get paid ask your financial institution to automatically transfer funds into this savings account each payday. If you put yourself at the top of your priority list, instead of at the bottom, you’ll increase your odds of achieving your goal.
Monitor Your Progress Regularly
Keep an eye on your progress and avoid the temptation to use the funds for non-emergencies. Having unexpected car repairs may be challenging to deal with but it’s not the same as losing your job and having reduced income for a number of months.
Tips to Consider When Making an Emergency Plan
- Review your insurance coverage with your insurance broker to ensure you have adequate coverage and to know what you are covered for.
- Take pictures of your belongings and store them electronically in the event you have to file an insurance claim.
- Make electronic copies of all important financial and other documentation. Store the copies in the cloud for safe keeping or print and store copies in a safety deposit box.
- Temporarily lower personal loan or line of credit payments to interest only status if you’re facing a financial emergency.
- Contact a not-for-profit credit counselling agency for assistance if you are caught by a life event/financial emergency before you are financially ready.
The Bottom Line on Preparing for a Financial Crisis
When facing a financial crisis the last thing you want to do is take on more debt. Depending upon the length and severity of the crisis the additional debt could be the factor that pushes you over the edge financially. Don’t be afraid to seek the help of qualified professionals as well as friends and family to help you get back on your feet. What you learn will help you successfully manage your money in the future and recover faster once your household income is stable again.