Although we try to live life as wisely as possible, financial emergencies do arise simply because of the unpredictability of life. We might plan, but the best we can really do to protect ourselves from life’s financial emergencies is to have an emergency fund in place.
Read this comprehensive article to learn how to quickly build up your emergency fund
Once you've dealt with a financial emergency, you'll need to rebuild your rainy day fund - read this comprehensive article on how to quickly rebuild your rainy day fund
So, what do we do when we are facing a financial emergency?
The financial media speaks constantly about the importance of having an emergency fund and on how to build one up, but we rarely come across articles or videos or pieces on how to actually deal with those inevitable financial emergencies. This is unfortunate because, although a rainy day fund is crucial to your financial stability and your ability to build wealth over time, the ability to handle financial emergencies with a bit of savvy is also an incredibly useful financial skill that will pay dividends over time - handling financial emergencies well will allow you to use less of your emergency fund and get back on your feet more quickly so you can start earning and investing again.
Long-term vs. Short-term Financial Emergencies
It’s obviously impossible for us to know your exact financial emergency within the context of this piece, so you should take what’s written here with a grain of salt and filter it so that it makes sense for your and your situation. However, there’s one point we do want to bring up regarding your potential financial emergency: your emergency will either be short-term or long-term.
Here are a few examples of short-term financial emergencies:
Here are a few examples of long-term financial emergencies:
Whether you’re facing a short-term or long-term financial emergency, this article is for you. However, if you’re facing a long-term emergency, you will have to follow the steps for a longer period of time as you traverse the emergency - whether it be looking for a job or healing from an injury, you’ll have to follow the advice (which might prove difficult at times) while getting your life back in order so you can go out there and win again (and again).
Cut Expenses Fast and Hard
In a financial emergency, the first (and possibly the most crucial step) is to cut expenses down deeply to bare necessities while you are recovering.
Remember, your "monthly living expenses" as we defined them do not equal your income or your average monthly spending during normal times - your monthly living expenses for calculating the size of your rainy day fund are just those expenses that are required to pay for the basics. So, you'll have to cut down so you can stay within those monthly living expenses. That means that while you’re dealing with the financial emergency there are no fancy dinners out, no new clothes that aren’t absolutely necessary, no trips, no gifts, no luxury purchases, and no other luxuries.
Read this article for an in-depth piece on what we include in your monthly living expenses when calculating the size of your emergency fund
This is hard to write about in such a general article, but it’s important to note. You must strive to recover from your financial emergency quickly. This might seem obvious, but it’s a little more nuanced than it might seem at first glance. What we mean by recover quickly is that you should be willing to exert energy and spend money from your rainy day fund (within reasonable bounds that you have to put in place for yourself) to get things back to normal.
For example, if your washing machine breaks and your family can’t wash clothes anymore, it’s wiser to get things taken care of by repairing or replacing the washing machine than by delaying in some sort of attempt to save money.
In another example, if you are injured in some way, it is wiser to quickly recover at home and use some of your rainy day fund to get by instead of attempting to work while recovering and thereby delaying your recovery while underperforming at work due to your injury. You'll recover faster, you'll be back on your feet sooner, and you'll have a better quality of life throughout the recovery.
Recovering quickly from a financial emergency means being willing to use some of your rainy day fund in order to get things back to normal so that you can continue earning money, building wealth, and enjoying life. Your emergency fund is there exactly for this - for financial emergencies.
Maintain a Positive Outlook
Above all else, do your best to not get discouraged by a financial emergency. Many people feel discouraged when one of life's financial storms wreaks havoc on the financial house you were trying to build. Rest assured, however, that you'll recover from this and move far beyond your current state and station if you consistently apply the principles of prudent investing and frugality to your life.