How to Create a Financial Emergency Plan

My son recently brought home a homework assignment. He was supposed to write down a plan for what to do if there was a fire in our house. He’s not even 6.

That same week, our daughter told us about a fire drill in her daycare. She’s only 3.

Even at that age, it’s important to have a plan for the direst of circumstances. Fires are chaotic. To help cut through the confusion and the stress, we come up with plans and practice them. Without confusion, there will be less chaos and fear.

If we plan and practice a response to a fire emergency, why don’t we do the same for other emergencies?

Do you have plans for a car accident or a medical emergency that could leave you with four- or five-figure debt? You may have an emergency fund, but you probably don’t have an emergency plan. And it’s time you created one.

The key to a successful financial emergency plan is that it outlines the steps you would take if you ever had to face that emergency. It means you’ll walk through what you would do if the emergency were actually happening.

For example, the biggest financial emergency I can think of is losing my job.

In my emergency plan, here’s what I would do:

• Lower (or cancel) all nonessential expenses. I would immediately cancel Amazon Prime, my Netflix account and all the recurring costs that are completely discretionary. For services I couldn’t cut immediately, such as my two-year cable internet subscription, I’d downgrade the service to the lowest possible tier.

• Adjust my budget. Since I’d need to live off my emergency fund, I’d need to adjust my budget to be deliberate in my spending.

• Learn how to apply for unemployment benefits. I’d need to know the process for getting unemployment from my local state unemployment office. Learning it now would be easier than under duress.

• Decide how to tell my family. This can be one of the hardest things to do, but preparing for it in advance could make it far less painful.

• Establish a plan for finding a new job. Whether it’s setting up profiles on relevant job search sites or reaching out to my network, I’d establish that plan now so I could execute it later.

• Consider how to spend my downtime. Maintaining a positive attitude during a negative experience — one that could persist for many weeks — is crucial. So is planning for the greater abundance of downtime during the week. I’d need to find projects that would give me a sense of purpose to combat the frustrations I’d experience during a job search.

This is just a subset of the things I’d do if I was laid off. As you build your plan, you’ll want to expand on this list, but I wanted to provide a starting point. (Another good starting point: Checking your credit scores, which can impact your finances. You can view two of them for free, with updates every two weeks, on Credit.com.)

What Events Should You Plan For?

The big ones are a death in the family (including yourself), loss of your job or ability to do your job and catastrophic loss of a major asset like your home or vehicle.

Once those major emergencies are covered, you can expand to less-significant but important emergencies. What if your furnace or HVAC system fails? What if your oven, washer, dryer or other major appliance stops working? These are not as financially painful as losing a job or your car, but they’re still inconvenient and require research.

As you build out your plan, don’t be afraid to add to it. No emergency is too small, and taking the time now will pay off in the long run.

Hopefully you’ll get lucky and never need your plan at all.

Image: sturti