No matter how much you prepare for the future, you never know when you could encounter a financial emergency. You could be in a car accident, or you might fall victim to a natural disaster that results in substantial unforeseen costs.
It is always hard coming to terms with a sudden change in your life, especially if the emergency has negative implications. In these situations, you will need to draw on your resources to overcome the physical and emotional repercussions. It is also essential to keep in mind that, sometimes, the most long-lasting and complex challenges to overcome are financial.
According to most financial advisors, the best way to avoid distress in the face of a financial emergency is to create an emergency savings account, which should cover between three and six months’ living expenses.
Having a healthy emergency fund tucked away offers a lot of benefits.
Knowing that you are in a position to take care of yourself should something happen that compromises your ability to earn money will likely reduce your stress levels. It also means that you can respond to a financial emergency without taking on debt. Creating those cash reserves, however, requires some discipline.
While having an emergency fund is essential to maintain your financial wellbeing through a crisis, unfortunately, most Americans are not as diligent about saving as they should be. In fact, according to a recent study, most working-class Americans have less than $1000 in savings in their current accounts.
If you find yourself in a financial emergency and do not have any immediate cash reserves, you might have to take on debt to get you through the crisis. Taking on debt when you are already vulnerable can have long-term effects on your financial outlook. You may also have to reach out to family and friends for help, which is also not ideal because you will eventually have to find a way to pay your benefactors back.
Fortunately, if you are the beneficiary of a structured settlement or annuity, you do have the option to exchange your monthly payments for a lump sum of cash. You could use this cash to get you through a crisis without the added financial and emotional burden of long-term debt.