Are You Ready for a Financial Crisis?

Posted by Mike Smith :: September 24, 2007 @ 6:58 am

It’s amazing how quickly your financial situation can change. One minute you’re sailing along smoothly, making good progress towards your goals, and the next you’re in a downward spiral with little chance for recovery. Many times, there’s a single event that triggers the change. Preparing for that event can significantly reduce its impact.

Typical triggering events can be an unexpected expense, an interruption of income, or simply unlucky timing of when a bill comes relative to your paycheck. All of these triggering events tend to be temporary setbacks. You would be fine if you could just buy a little time to get past them. The way that I suggest getting through these difficult times is to make them part of your plan.

When you are building your budget, include unexpected items as well. While it might be hard to anticipate the frequency or amounts of such occurrences, putting something in your budget is still a good idea. If you overestimate, then you’ll have extra money at the end of the year. If you underestimate, then you’ll still have to come up with the difference, but the impact will be less, since you already have some funds earmarked for this situation.

A general rule of thumb for handling unexpected expenses and temporary setbacks is to save three months’ worth of expenses in cash equivalents outside of your retirement assets. You then have plenty of money available to handle most situations. Once you reach the three-month goal, you can extend it to six months’ worth for even greater protection. In order to reach these goals, you will need to know what your monthly expenses are. This is another reason that having a budget is so important.

P2P loans from Lending Club are an affordable way to refinance credit card debt and finance large purchases, but they are great for handling unexpected expenses as well. While budgeting for unexpected items and building up expense reserves works too, if you need a little help before you’ve reached those goals, Lending Club may be the solution that you’re looking for.