How to budget for emergencies
Having a financial emergency can have long-lasting effects on your financial well-being. Being surprised with unexpected expenses can lead to debt and high interest payments if you aren’t prepared. Although we can’t always prepare for every single curve ball that life throws our way, we can adopt habits to help budget for emergencies.
Here are three ways to budget for emergencies:
1. Start an emergency savings funds
Opening a savings account can help lower the financial impact of an emergency. If your car breaks down and you receive a hefty bill from the mechanic or you need to book a last minute flight for a family tragedy, having a lump sum of cash you can access any time will help avoid using credit cards and getting into debt.
An easy way to budget for emergencies is to put a little pit of money aside into a savings account with each paycheque. This way the money earns a small amount of interest if you don’t need it and it’s always accessible (without waiting periods) in case you do need it.
2. Don’t forget about insurance deductibles
Many people think they don’t need to budget for emergencies because they have insurance. If only that were true and life was that easy. We buy insurance to help cover the replacement and repair costs if we should have an unexpected loss to our home or car. However, insurance doesn’t cover all the costs because every car and home insurance policy has a deductible.
A deductible is the amount of money that you (as the policy owner) are required to pay out of pocket before the insurance benefits start to refund expenses. A larger deductible can offer you the chance to exchange for lower insurance premiums. It’s an easy way to lower your annual insurance costs, but if you need to file a claim it means you need to shell out a lump sum of your own money – and you may not have it.
Putting aside the amount of your home and auto insurance deductibles is a smart idea. If you do have a financial emergency, you’ll have the money on hand to pay for the deductible. Putting your tax refund or annual bonus aside into savings is an easy way to make sure the cost of your deductible is covered.
3. Buy the right insurance coverage
Another way to budget for emergencies is to review your insurance policies and make sure you have the amount and type of insurance coverage you need. Car and home insurance policies renew on an annual basis and it’s the perfect time to look over the fine print because our needs can change from year to year.
Look over the type of coverage you have and ask yourself: does it include all of your personal belongings? You might need to buy additional home insurance coverage for fine art and jewellery. Does it cover all possible scenarios? You may only have limited coverage on your auto insurance policy, and it may be worth it to purchase comprehensive coverage.
If you’re not sure which type of coverage you need, speak to a licensed insurance agent, they’ll have you find the right coverage and budget for emergencies.