Ask An Expert: How Can I Emergency Prep My Money?

This article is brought to you by Fidelity.

If you follow TFD on Instagram, you’ve most likely met our resident investment expert, Amanda Holden! Here, she breaks down one of the biggest money questions our readers have been asking lately.

How do you best prepare your money for an emergency? I appreciate this question. Because here’s what we’re really getting at: Can we channel our worry into a plan that ultimately makes us feel better, both financially and emotionally? 

In just a few short months, we’ve experienced a devastating pandemic, widespread job loss, and increased economic insecurity and concern. Can we be honest about this? It is hard and scary. Wanting to understand the most effective ways to prep for an emergency is a natural and mature response. And although a money plan won’t cure all anxieties, taking action may help bring you a bit of mental peace.  

Here are four steps you can take to emergency prep for now and into the future, beyond building yourself into a fortress of toilet paper. 

1. Know Your “Essentials” Budget 

A critical element to financial preparedness is having a deep comprehension of your cash flow — what’s coming in, and what’s going out. Especially considering how much about our spending has changed over the last few months, we’re all likely due for a review. Make yourself a hot coffee, light a candle, and print out your last three months of bank and credit card statements. As you track your spending, make a note of what falls into the “essential to survive” category, and what could (honestly!) be done without. 

If you have lost income or expect that you might lose income, you may have already switched over to an essentials-only budget. There’s no need to sugarcoat this, it sucks. I hope that it is only temporary. 

Two things will come from this exercise. First, you’ll be able to identify areas in your spending that you could easily and ethically cut back (such as unused subscriptions) or negotiate (like currently overpriced auto insurance premiums). Second, you’ll gain a better understanding of what you need to save in your emergency fund, which ideally covers between six months and a years’ worth of essential spending.

As a bonus, tracking cash flow is the first step to creating a realistic budget. Anyone who has ever tried to skip this step, knows; creating wholly aspirational category limits is a strategy that is sure to fail. While there’s absolutely no need to beat yourself up over your spending—it’s not your fault groceries are dang expensive!—it’s important that we also be realistic, especially when our survival may depend on it. 

2. Build An Emergency Fund

Right now, making sure that you have plenty of cash in the bank is the name of the game. This money is to be reserved for emergencies, like paying the bills during an unexpected layoff.

In the world of personal finance, there’s plenty of disagreement about exactly how much emergency money a person should have. That’s because there’s no one “right” amount that works for everybody! How much money you’ll need depends on your unique circumstances, like your job stability, cost of living, and whether you have a second income via a spouse and dependents. That’s why Step #1 is so important—building an emergency stash of 3, 6, or 12 months of expenses requires knowing this number.

While it may be ideal to have a minimum of 6 months’ worth of necessary budget items in an emergency fund, this simply will not be realistic for some people—especially not now. That’s okay; all you can do is your best. If you currently have no emergency savings, aim to save $500. Once you’re there—breathe and take a moment to be really stinkin’ proud of yourself—and then work towards $1,000. 

Keep an emergency fund in a bank account that is separate from your checking account, so you’re not tempted to spend that money on quarantine boredom shopping. Guilty as charged! [Quietly exits out of online shopping browser.] Bonus points if you use a high-yield savings account. No matter which bank you use, be sure the money is easy to access and avoid banks that charge a monthly account fee. 

3. Create A Contingency Plan For Income 

Telling someone to build an emergency fund if they don’t have income is silly at best and hurtful at worst. If you’re simply not able to save right now, it’s okay. Your focus should be on your income, anyway. 

In an economic downturn, our biggest collective concern is losing work. Therefore, we must absolutely consider creating a contingency plan for our incomes. This is easily the most-overlooked part of emergency planning, which I totally get. It’s tone-deaf to tell people who are already stretched way too thin and working way too hard to stretch themselves even thinner and work even harder. 

Here, the advice diverges, depending on whether you are currently employed or not. If you are employed, you’ll likely want to shift your energy to maintaining your current source of income. Ask yourself: How can I make myself so valuable to my company that they’ll do anything in their power to keep me on the payroll? How can I be part of the reason that my company makes it through this crazy time?

If you are lucky enough to have a job, you may want to act as if you are going to lose it in a month. In emergency planning, we should assume the worst. For some, this may mean enforcing a self-imposed period of austerity to build up savings or taking advantage of workplace benefits such as health insurance. Maybe you’ll want to order a year’s worth of prescriptions or buy reimbursable contact lenses or glasses.

Of course, not everyone will have control over their own employment. That’s why it’s also a good idea for both the employed and the underemployed or unemployed to consider another source of income. 

Those in immediate need of income may want to consider doing freelance work, which provides a quicker payout than building a product or a business. If you’re having trouble knowing where to start, ask your networks what they could use help with right now, and tailor your offerings to fit those needs. You have an incredibly useful skill that some person or parent or business owner is in need of, I know it.

4. Know Your Avenues for Relief 

Even if you’re currently employed, it’s smart to know where you can turn to in the event of an emergency. Those who are unemployed have likely already begun this investigative journey. Start with something as simple as compiling local phone numbers, emails, and addresses of these resources. For example, write down a list of a few local healthcare providers that are covered by your insurance so that there’s no question where you should go in the event that you get sick.  

Next, do not hesitate to file for unemployment if you are laid off from your job or lose work. This will require patience and stamina as you navigate your state’s unemployment website, but you’ll need to be relentless. This is likely going to be your most important source of reprieve in the coming months. 

If you are self-employed or a small business owner, you may qualify for a loan through the Paycheck Protection Program (PPP) or Economic Injury Disaster Loan (EIDC) programs. No luck there? Ugh, join the club. Continue to investigate small business grants through city, state, and privately-run programs, such as the women’s small business grant offering by Spanx. Stay on the lookout; new programs are going to continue to crop up and old programs may have their funding replenished.   

Understand the benefits available to you through the CARES Act, otherwise known as the “stimulus bill.” This is the program that provided $1,200 stimulus checks to some qualified citizens. If you are not in the US, check into the programs offered by your federal and local governments. 

Emergency planning is both difficult, somber work and completely worth it. Good luck.

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