Building and reviewing an emergency plan can help your family know what to do in a crisis – especially if the next one is financial. Here’s how to create your own family financial emergency plan, stress-test your budget, and build a great financial foundation.
Step 1: Assess your current financial situation. Start by gathering the following information:
- Income sources. Document all incoming money, including salaries, wages, side gigs, and passive income.
- Fixed expenses. These are expense you pay at consistent intervals, such as your rent or mortgage, utilities, insurance, or internet access.
- Variable expense. This includes items like groceries, gas, and entertainment.
- Discretionary spending. These are the nice-to-have but not necessary expenses such as shopping, hobbies, and certain subscriptions.
Step 2: Simulate a job loss or income cut. Next, simulate a scenario where one or both income earners lose their jobs or face a significant pay cut. Ask the following questions:
- How long can you continue meeting essential expenses?
- What would be your first financial response? (cutting discretionary spending or using savings)
- What resources are available? (emergency fund, severance, unemployment benefits)
Now rebuild your budget assuming this new, lower income level. Prioritize essential categories such as housing, food, utilities, & healthcare. This exercise help you pinpoint which expenses can be eliminated or reduced.
Step 3: Build an emergency fund. Financial experts recommend saving 3 to 6 months’ worth of living expenses. If this amount feels out of reach, aim for one month of essential expenses and build from there.
Step 4: Identify candidates for cutbacks. Pinpoint which expenses you could immediately pause or cancel in a crisis. Then develop a cutback plan in writing. This becomes your go-to response plan, allowing you to act quickly with no emotion or debate.
Step 5: Create an income recovery strategy. Increasing your income can speed up recovery. Brainstorm income replacement options in advance such as side hustles or freelance work; gig economy jobs like ride sharing, delivery, or tutoring; selling unused items online; accessing short-term assistance programs; tapping into a professional or industry network for job leads.
Step 6: Practice communication and assign roles. While creating your financial emergency plan, bring your family together and assign roles:
- Who handles bills and payments?
- Who checks into benefits and aid?
- How will you explain the situation to children in age-appropriate ways?
Step 7: Review and repeat. Your financial emergency plan isn’t a one-time task. Schedule reviews every 6 to 12 months or after any major life event like a new job, having a baby, or moving.
Creating a family financial emergency plan doesn’t guarantee immunity from hardship. But it does provide clarity, direction, and peace of mind. It also ensures that when the unexpected happens, you’re not starting from scratch.