How to plan for an emergency

It used to be the case that only low income families lived paycheck to paycheck. As the recession strikes deeper into the economy, the problem is spreading upwards through the middle class. The majority of people in the US have no savings and are currently unable to save any money after paying all the bills. If, for any reason, the regular paycheck is delayed or lost - say, through illness or unemployment - people will not be able to continue their lifestyles unless they borrow. This leaves them very vulnerable because, with only unemployment and other benefits available for a short time from the state, existing and all new debt quickly becomes unaffordable. This makes it sensible to plan for a financial emergency. The alternative is panic and decisions taken too fast to ensure they are the right decisions. So now is the right time to sit down quietly and work out what you would do if there was a real emergency. It might be an accident like a fire at home, or a sudden illness or perhaps a family breakdown threatening divorce. Whatever the cause, you should have a plan.

So what should go into the plan? If you have assets, you need to decide what can be sold and what should be kept. Sometimes, you keep an asset like your home because it is necessary as a place to live. Equally, you can sell an asset because it costs too much in maintenance and upkeep. The best plans set a list of priorities. That you fight to keep some assets and aim for the best price you can get for the others. Once the cash starts to come in from this forced liquidation, you now have to decide what to do with the money. Some debts carry high rates of interest. Paying them down as quickly as possible can save you a great deal of pain later on. But you must always look at the big picture. If your current review finds many debts, most with high rates of interest, a good strategy is to try negotiating a consolidation of those debts while your credit score and general finances are in a reasonably good state. If you wait until your income is disrupted, lenders are not going to be so willing to offer you new loans. Packing as many of your current short-term liabilities into one longer-term loan can not only save you money now, but also give you a good buffer against bankruptcy should an emergency occur.

All this to avoid the need to take a payday loan or its high-interest equivalent as a solution to a financial emergency. It' easy to tell yourself that, should there be a small to moderate crisis, everything can be solved by a short-term loan. The problem with this view is that the costs of these loans quickly run into interest payments of more than 100%. The statistics show that people who take what is supposed to be a bridging loan to tide over for one month end up in debt for ten or eleven months. Having a plan helps you avoid being caught in the debt trap.