How to Prepare for a Cash Crisis

HOW TO PREPARE FOR A CASH CRISIS

Trouble comes in threes, they say.  Your car breaks down, your laptop dies, your child falls sick, a relative passes away, all in the same week that you get a letter from the landlord explaining that you are in rent arrears and he will soon repossess the house unless you pay up.  A cash crisis isn’t necessarily avoidable, but it helps to be prepared.  You never know when a loss of a job, sudden illness or disaster may occur, so it helps to have some sort of idea as to how to prepare for the day when you will face a cash crunch.  Here are a few more tips regarding what you can do to

prepare for a financial emergency.

Plan ahead

Just as a business needs to run financial forecasts estimating sales and expenses, you should have a financial forecast for your cash flow in your household as well.   Make sure you have well-padded emergency reserves.  Recognize that the day may come when you will need cash and not have available income with which to cover it.  Try to establish cash savings that will allow you three to six months worth of living expenses and don’t touch that money. That money is only for emergency use and not for vacations or that new big screen TV you want. This money is to be set aside and ignored until you need it. While you are at it, try to establish some long-term savings solutions as well. Retirement plans are fine, but you should also put some money away in certificates of deposit, stocks, or mutual funds for that long term rainy day.   The long-term emergency funds can be kept in investments that have the potential to earn higher returns and then used only when you need the money.  In addition to replenishing emergency reserves, continually update your budget. When you are dealing with irregular pay periods or variable expenses, estimate a best-case, most-likely and worst-case scenario and adjust your budget to weather the worst-case scenario. This may allow you to catch a cash flow dip and take actions to correct it before it becomes a full-fledged crisis.

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