What is a financial emergency, and how do you plan for one?

Like a wobbly stack of dishes, personal finances can feel like a balancing act. The trick is to be prepared for whatever may come your way while also living a full life. It’s a trick you can master. 

The first step is to figure out precisely what constitutes a financial emergency.

What is a financial emergency?

A financial emergency is an unplanned expense or loss of income that could disrupt your financial stability. 

Let’s say you’re on a road trip with your family or a few close friends. You’re having a great time when your car suddenly starts shuddering like the world’s cutest chihuahua. You pull off to the side of the road and call roadside assistance.

Once your car’s been towed for repair, you learn that the suspension is shot and it’ll cost roughly $2,000 to repair. But you don’t have the cash to cover it, and neither does anyone else in the car.

It’s a true financial emergency. Scraping together an extra $2,000 impacts your finances right now. And if you manage to borrow the money, you’re going to have to find a way to repay it.

Wanting the latest celebrity-endorsed kicks or splashing out at an expensive club isn't a financial emergency. You can turn down new shoes or a night out. When a real financial emergency strikes, you have no choice but to find a way to come up with the funds.  

How to handle a financial emergency

A comfortable emergency fund is big enough that you could cover all of your expenses for three to six months without any income. 

That doesn’t necessarily mean that you have to save up three or six times your monthly income. You just need enough to protect your finances if things suddenly go south and you have trouble paying your bills. Let’s say your basic monthly bills run $2,000, including rent, utilities, groceries, and other essentials. Ideally, you’ll build an emergency fund of $6,000 to $12,000. That way, you can pay three to six months’ worth of bills if you lose your job, become seriously ill, or run into another emergency.

If there are two earners in your home, you could aim for the low end because it’s less likely that you’ll both be without income at the same time. If you’re a single parent, you might feel more comfortable with a larger amount saved. 

Should you borrow to cover a financial emergency?

In some cases, it might make sense to borrow money to cover a large, unexpected expense.  

If your car needs $2,000 in repairs and you’ll lose your job if you can’t get to work, that’s a time to consider taking out an emergency loan. Consider carefully whether you can afford the payment on the new loan. You don’t want to do anything that would make your financial situation even more fragile.

Not just for the big emergencies

Big emergencies happen, but smaller stuff has the potential to disrupt your finances, too. A bigger than expected utility bill, a flat tire, or an unexpected trip to an emergency veterinarian can make it difficult to meet your regular financial obligations. 

The goal of emergency savings is to get through a tough financial situation without going into credit card debt. It lets you take care of money issues as they crop up instead of spending months paying them off with interest. 

Tips for managing unexpected expenses 

Keep these tips in mind as you consider strategies for managing the next financial emergency.

1. Begin building an emergency fund. Lots of people don’t have money set aside yet. Start small, and make it a habit. Your first goal could be a few hundred dollars. Then work up to $1,000. After that, one full month’s worth of expenses. Every dollar matters. 

2. Check your insurance coverage. Insurance, including health, home, auto, and disability, helps protect you from the significant financial burden of unexpected events. 

3. Make it a point to budget and save. You’re working on changing your financial habits to create a better financial future. Most people build their emergency savings over time, little by little. Keep contributing regularly, no matter how much or how little you can afford each month. 

4. Measure your debt level. A low debt level does two things: It leaves more room in your budget for saving money each month, and it could lower your stress level. If you’re stuck in a cycle of debt, choose a debt strategy. You didn’t get into debt overnight, and you’re not likely to get out of debt overnight. As long as you’re moving in the right direction, you’re becoming more and more prepared for life’s financial emergencies.

5. Stay on top of financial planning. Financial planning isn’t just for the rich. Creating a buffer for emergencies is easier if you know the details of your financial situation. Most people periodically adjust their monthly budget, and you can too. Adjustments are a normal part of budgeting as your needs and priorities change.

You’re taking the right steps. 

What’s next

No matter where your finances are today, you're in the driver's seat. Here are your next best steps:

• If you haven’t made a budget yet, start. Your budget is your plan for how you want to spend the money you earn.  

• Choose a place where you’ll save your emergency funds. A high-yield savings account is a great option, and they are easy to open online.

• If debt is making it difficult to handle financial emergencies, review debt solutions for one that makes sense for you. For example, if you have good credit, a debt consolidation loan might relieve your budget. If you can’t afford your debts, you might be a candidate for debt resolution or bankruptcy. A debt expert can help you understand your options.