What is a Financial Emergency? Preparation, Management, and Prevention Tips

What is a Financial Emergency?

Everyone has dealt with a tough financial situation at some point in their lives. From medical bills to car repairs, expenses can arise when we least expect them. If you don’t have enough funds in your bank account to make an unexpected payment, you may have considered getting a fast loan or relying on your credit card to get emergency relief. However, did your circumstances warrant that solution? What is a financial emergency?

Anything that is considered to be a sudden, unforeseen event that significantly impacts an individual’s ability to manage their money is a financial emergency. These situations often disrupt a person’s financial roadmap, leading to a strain on their budget and, in some cases, an inability to handle basic living expenses. The level of what is considered an emergency may differ from person to person, as everyone has a unique financial situation. This kind of emergency can be as “small” as paying for new shocks and struts for your car to larger, more expensive payments, such as surgery costs, funerals, or massive home repairs.

Examples of Financial Emergencies

Here’s a closer look at some of the examples of situations that can disrupt your finances:

• Unexpected Medical or Dental Emergencies When You Don’t Have Health Insurance Coverage
• Blown Car Engine 
• Loss of Income Due to Unemployment, Illness, or Injury
• Repairing Damages to Your Home Caused By a Natural Disaster

Regardless of the circumstances, if you’re having issues covering an unexpected bill or expense, you may be facing a financial emergency. Continue reading to learn more about handling complex emergencies and discover some options you can use to fix your situation and protect your finances in the future. 

What is Not Considered a Financial Emergency?

Before you search for ways to pay for an expense, it is important to understand what isn’t considered a financial emergency. Check out some of the common expenses that you may not be able to afford, but aren’t considered to be a financial emergency:

• Vacations and Weddings
• An Expensive Gift for Someone’s Birthday or Wedding
• A Pricey Outfit for an Event
• Non-Essential Household Items, Like New Furniture or a Television

When you want to fit certain expenses into your monthly budget, you should ask yourself if the items are essential or non-essential. An essential item is a payment you must cover in order for you to live or work, while non-essential payments are things that you want, but aren’t as critical for existing comfortably. If you’re thinking about using your savings or tax return to solve a non-emergency situation, consider working a side hustle for a few months or selling items online to get the funds you need.

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How Can You Prepare Yourself for Financial Emergencies?

Some costs, like medical expenses and emergency dental bills, are unpredictable. However, you can work to lessen the impact of unexpected bills and expenses by preparing yourself financially. As a responsible individual, you can implement the following techniques to stay afloat during a financial emergency:

• Build an Emergency Fund: Having an emergency fund is crucial in safeguarding your finances from financial difficulties. Without an emergency fund, you are more financially vulnerable and may rely on loans or credit cards to make ends meet when you’re facing an emergency. This type of fund may sound similar to a savings account, but it is specifically designed for expenses that can drain your budget, such as losing your job or being involved in a severe car accident that results in significant medical bills. A savings account is designed to help you reach your financial goals, like saving for a down payment on a home. You can build your emergency fund over time by cutting back on non-essential spending and automating contributions by depositing a portion of your paycheck into a designated bank account each pay period.
• Review Your Insurance Coverage: Ensure you have enough health, auto, and home insurance coverage to protect yourself from significant and unexpected expenses. Evaluate all your insurance plans to verify that you have adequate coverage for things like prolonged hospital visits, substantial car accidents, and property damage caused by natural disasters. By understanding your coverage, you can minimize potential financial burdens in the event of an emergency. Consider consulting with an insurance agent to help you compare different policies if you don’t have sufficient coverage for a potential risk that concerns you.
• Minimize High-Interest Debt: Paying down high-interest debt, like payday loans, can help you save more money for potential emergencies and reduce the strain on your finances. Through one of the most popular methods to pay off debt, known as the debt avalanche strategy, you will make the minimum payments on everything – excluding the account that you want to focus on, because you will aggressively pay off the loan or credit card with the highest interest rate. Once that debt is paid off, focus on the next debt with the highest interest rate, and so on.
• Create an Effective Budget Plan: If you haven’t done so already, establish a budgeting plan that prioritizes your essential expenses and leaves you with enough spare cash for unexpected emergencies. There are various budgeting techniques you can use to achieve that goal, such as the 50/30/20 rule or the “Pay Yourself First” method. Regardless of the strategy you use, it is essential to review your budget regularly to prevent overspending. 

The key to preparing for a financial emergency is to focus on your goals and save enough money for unanticipated costs. You can try using some of the recommended methods simultaneously to ensure you are as prepared as possible for the worst, while expecting the best. No matter what you decide to do, make sure that you’re consistent with your plans. If you are disciplined enough and focus on saving, you may have sufficient funds set aside to make ends meet and handle whatever expense life throws your way.

How Much Money Should Be in an Emergency Fund?

If you choose to build an emergency fund, you may wonder how much money you should deposit into your account to prepare yourself for any type of financial crisis. A good rule of thumb is to save enough cash to cover three to six months’ worth of living expenses. Those with fewer assets and greater concerns about long-term financial stability may prefer to save for more than six months of expenses. 

When you’re starting to build an emergency fund, you may want to save the recommended amounts as soon as possible. However, the reality is that you may not have sufficient income to meet those financial goals within a short timeframe. The total amount you’ll be able to save per month will depend on your financial position and how much money you’re comfortable depositing into your bank account every time you receive a paycheck. Remember to automate your savings and strive for consistency.

Frequently Asked Questions About Financial Emergencies

Below are a few frequently asked questions that can help you feel more prepared for budgeting challenges:

What are the Most Common Financial Emergencies?

In order to understand how much you should save for financial emergencies, it’s important to know the most common situations you may encounter. Recent surveys have shown that medical bills, job or wage loss, and car troubles are some of the most prevalent financial emergencies for consumers. 

What are the Early Warning Signs of Becoming Financially Unstable?

Detecting some of the early warning signs that you may become financially unstable is important, especially if you are currently struggling to make ends meet. Some of the biggest red flags include spending more than you earn, misusing or overusing your credit card, having too much debt relative to your income, or being denied a loan or credit card due to a low credit score.

What to Do When You’re Financially Broke?

Being broke can feel discouraging and hopeless. However, some available solutions can help you understand how to turn things around and get into a more stable financial position. First, you must assess your current financial situation and identify some of the issues that led you to this predicament. Potential solutions can include exploring side hustles or cutting back on some of your monthly expenses. If you’re really broke and you need extra help to get your finances back on track, you can rely on government assistance programs during these challenging times, like the Supplemental Nutrition Assistance Program (SNAP). 

What are My Options for Financial Emergency Assistance?

No matter how much you plan for a financial emergency, there may be some instances where your expenses exceed your expectations. If you’re in deep financial trouble and don’t have enough cash to manage your situation, it’s important to explore your available options to get your finances in order. Ensure you review your current situation and check out the resources listed below to determine what solution works best for you:

Government Assistance Programs

As mentioned above, you can take advantage of some of the available government assistance programs to get your finances in order. Some Americans rely on the Federal Emergency Management Agency (FEMA) programs, such as the Individuals and Households Program (IHP), to cover damages caused by a natural disaster, while others work with the Low Income Home Energy Assistance Program (LIHEAP) to help pay for energy bills or receive home weatherization assistance. If you need help with a specific financial situation, you can call 211 to find relevant programs in your area that meet your needs. You can also get assistance through various charitable organizations, such as the Salvation Army or United Way.

Apply for a Consolidation Loan

A loan can help you get the necessary funds to pay for unexpected bills or personal expenses. If you want a convenient option to consolidate debt and get fast cash, consider applying for a secured loan, like a car title loan. Through a vehicle-secured loan, you will pledge a vehicle title in your name as collateral for the loan and access emergency money. Unlike traditional bank loans, you don’t need a good credit score to qualify for funding, and you can access competitive interest rates through title loans serviced by LoanMart.¹

If you apply for an auto title loan serviced by LoanMart, you can expect various benefits that may improve your borrowing experience. Not only can you access a convenient online application process, but you can also expect flexible loan terms and several ways to pay your loan. If you receive full approval and decide to sign your loan contract, you can use your money to deal with tough financial situations. Qualified applicants can typically access their cash as soon as the next business day!³

Don’t let a financial emergency get the best of you when you have many options to explore. If a car title loan serviced by LoanMart sounds like the right fit, you can begin the application process online or call a title loan officer at 855-422-7412 to ask any questions you may have about applying for a vehicle-secured loan.