Many Americans at one point or another will deal with an unexpected event that has financial implications. As a financial advisor, I’ve witnessed many families encounter – and more importantly overcome – financial setbacks. For most families I work with, setbacks occur because of circumstances beyond their control, such as a job layoff, a car accident, a house fire or the onset of an illness. If you find yourself facing a similar unexpected situation, here are five steps to help you regain your financial footing and confidence:
1. Give yourself permission to dip into your emergency fund. It can be hard to spend your hard-earned savings, even when you are facing unexpected bills. Remind yourself that the point of having money set aside is to handle unplanned costs with as minimal impact to your usual spending as possible.If you need to use it all, do so without guilt.
2. Craft a financial strategy to combat the expenses. If the costs are more than your emergency fund can cover, take the time to plan out how to address them. Your strategy may include:
–Insurance. If your situation involves an expense covered by insurance, contact your company as soon as you can to start the claims process. If you’re unsure of whether an expense is covered by your policy, ask. Document key details of the situation and remember to keep all receipts.
–Tapping other savings or investments. If you have savings separate from your emergency fund, consider withdrawing from these sources. While it’s likely you have the money earmarked for a more fun purpose (e.g. a second home, a new boat), it may be more important to take care of the unexpected expenses today. Whatever you do, try to avoid withdrawing from your retirement or college savings accounts. You may incur a penalty for using the money for non-qualified expenses and you would miss out on the chance to continue compounding your savings over time.
–Adjusting your spending. Depending on your situation, you can either rework your budget or simply be more mindful of your spending in the near term. If you’re living with a spouse or partner, have a conversation to help set financial priorities over the next few weeks or months. Communicating openly can help you work together to address the unplanned expenses and get back on track.
–Seeking professional help. If you’re unsure which investments to draw down or want a second opinion on the tradeoffs between using various sources of income, consult a financial advisor.
3. Prepare for next time. Once you’ve addressed the situation at hand, commit to restoring your financial foundation for the next inevitable unexpected event. Resave your cash reserve and create a plan to rebuild any withdrawn investment savings. Review your insurance coverage to make sure you have adequate protection and understand what expenses may be covered and where you may have gaps.