Financial crises, whether personal or economic, have a way of catching even the most prepared individuals off guard. Most people only think of the recession in 2006 and The Great Depression when you tell them about economic crises. However, it comes as a surprise to many that America has faced 14 official recessions since 1939. While they have become less frequent, they do seem to happen periodically.
But here’s the thing: a crisis doesn’t always take the form of a widespread economic downturn. It can stem from unexpected personal challenges, such as a medical emergency, job loss, or a sudden natural disaster. In these moments, financial preparedness can mean the difference between weathering the storm and being overwhelmed by its impact.
In this article, let’s look at three aspects to consider when thinking about your financial security.
#1. Don’t Overlook Insurance Coverage
Let’s be honest: these days, there’s no telling how and when you can enter a crisis. You could be living a normal life and suddenly learn that the medication you’ve been taking was silently building a tumor in your brain. That sounds like an Alex Jones rant, but you can verify this by looking up things like the Depo Provera lawsuit situation.
According to TorHoerman Law, many women who used this contraceptive for prolonged periods have developed meningioma. They are currently filing lawsuits against Pfizer for failing to warn about the risks of the medication.
Do you realize how expensive healthcare is for most Americans? If you happen to be unlucky with your insurance coverage, hospital bills can turn your entire life upside down.
What’s more, data from Statista shows that in 2023, more than 25 million Americans had no health insurance, let alone proper coverage. Sure, it isn’t as bad as in 2010 when the figure was 48 million, but the point is, it’s still a real problem today.
Without proper insurance, a single hospital bill could derail your financial stability. Thus, review your policy periodically to ensure it covers potential health emergencies and consider supplemental coverage if necessary.
#2. Start Diversifying Your Income Sources
In an era of economic instability, relying solely on a single income stream is a risky strategy. Diversifying your income not only provides a buffer during crises but also opens up opportunities for long-term financial growth.
In a piece published by the BBC, personal finance expert Alex King noted that passive income isn’t only achievable but a normal way to find financial freedom. He observes that this is partly due to the precarious contracts that many young people find themselves in.
There are numerous ways to diversify your income, ranging from investments in stocks and real estate to side hustles and freelance opportunities. For instance, investing in dividend-paying stocks can generate a steady flow of income over time.
Renting out a property or even a spare room in your home can also provide a reliable financial cushion. Meanwhile, the digital economy offers countless avenues, from creating an online course to monetizing a YouTube channel or blog.
Remember, the benefits of diversification extend beyond financial security. It reduces dependence on a single employer or industry, giving you more freedom and resilience in the face of economic downturns. Additionally, diversifying your income can help you build wealth faster, as you’re not limited by the constraints of a single paycheck.
#3. Ensure You Keep Adjusting Your Emergency Fund
It acts as a safety net, ensuring you’re prepared for unexpected expenses like medical emergencies, car repairs, or job losses.
According to Investopedia, the general rule of thumb is that your EF should cover household expenses for about three to six months. In this context, they point out that the U.S. Bureau of Labor Statistics puts the average household’s monthly expenses at $6,440.
However, inflation and rising costs mean that the amount you save today might not suffice tomorrow. So, review and adjust your emergency fund annually to reflect changes in your financial situation. Additionally, ensure your EF is liquid and accessible for immediate use during emergencies.
Consider placing your EF in a high-yield savings account, which allows you to earn interest while ensuring the funds are readily available in case of an emergency.
Additionally, think about the types of emergencies you’re most likely to face. If you live in an area prone to natural disasters, you might need to save more to cover potential evacuation costs or home repairs. Similarly, if you work in an industry with frequent layoffs, having a larger fund can provide extra security.
Frequently Asked Questions
1. What insurance is most overlooked?
Disability insurance is often overlooked despite its importance in replacing income if you’re unable to work due to illness or injury. Many focus on health or life insurance, but disability coverage offers vital financial protection in case of unexpected events.
2. How to earn a parallel income?
To earn parallel income, explore side ventures like freelancing, starting an online store, or creating digital products such as courses or e-books. You can also invest in stocks, real estate, or peer-to-peer lending platforms. Diversifying income through these methods provides additional cash flow without relying solely on your primary job.
3. What is the 3-6-9 rule in finance?
The 3-6-9 rule in finance refers to a guideline for savings and financial planning. It suggests having three months of expenses saved for those with stable incomes, six months for families or individuals with moderate income stability, and nine months for those with irregular or unstable incomes.
To summarize, you never know when a crisis can hit your life. That’s why it’s called a crisis. In other words, crises by their nature throw you off guard. Thus, the only remedy is to ensure you are prepared well in advance for them.
While we’ve listed three tips in this piece, just remember that there are several other aspects you ought to research depending on your life situation.