8 Tips to Prepare for an Unexpected Financial Burden
A financial burden can cause a lot of stress in your life, but you can mitigate its impacts with these tips.
Justin Cupler
Contributing Writer at Tally
September 8, 2022
You never know when a financial burden will strike, and they generally don’t strike at a time when you can easily manage it. Without proper preparation, these financial burdens can stretch into lingering hardships that can put you and your family in a challenging position.
Fortunately, you can take steps to prepare yourself for a potential financial burden so you can better navigate it and get through it quickly with minimal negative impact.
Below, we cover eight steps to take so you’re always prepared for an unexpected financial burden.
Preparing for a financial burden
It’s difficult to predict when a financial burden may strike, but these eight tips will help ensure you’re prepared to shoulder the burden if it arrives.
1. Live below your means
Trimming your budget before a financial burden strikes is a great place to start. Perform a systematic review of your monthly budget and see where you can trim or eliminate spending to create the largest cash flow surplus possible.
For example, if you have streaming subscriptions you forgot about or rarely use, you can eliminate them. Also, if you have a higher-cost cellphone plan, see if you can downgrade to a lower-cost plan to save some cash. If your apartment lease is up and your home is too much for you, you can save cash by renting a smaller place. Having a roommate to share expenses with is also an option to consider.
2. Increase your household income
The other way to create a cash flow surplus is to earn extra cash. If you or other family members in your household have spare time, pick up one of the numerous on-demand gigs available today, such as being a delivery driver, ride-sharing or assembling furniture, for example. You can also launch a freelance business using the skill or knowledge you’ve gained through work or life experiences.
3. Pay off your debt
One stress inducer during an economic burden is debt. Not only are you struggling to pay your living expenses thanks to this burden, but you’re also now paying interest on past purchases. With the average credit card charging 16% interest or higher, these fees can add up.
For example, if you have $5,000 in credit card debt and a 16.5% annual percentage rate (APR), you pay nearly $70 per month in interest if you make only the minimum payments.
There are many ways to pay off high-interest debt quicker, such as:
Choose the one that suits you and your financial situation and pay off that debt so it’s not lingering if a financial hardship strikes.
4. Negotiate with your credit card companies
As mentioned above, credit card interest rates can be very high and cost you a lot of cash. However, those rates are not etched in stone. You can call the customer service number on the back of your credit card and request a lower interest rate.
Remember, the credit card company will want a good reason for lowering your rate, so you can mention you’ve been a long-standing customer, made on-time payments, recently experienced a credit score increase, got a raise at work or other valid reasons. All these indicate you’re less of a risk, so you may be able to negotiate a lower interest rate.
5. Build an emergency fund
When a financial emergency strikes, like job loss or a wage reduction, it’s tempting to reach for your credit cards to fill the gap. Avoid this temptation by building an emergency fund covering three to six months’ worth of your living expenses. This way, you have the cash ready and don’t need to reach for those credit cards.
Storing this savings in an easily accessible high-yield savings account (HYSA) will allow it to earn interest while you’re not using it.
6. Build a rainy day fund
A rainy day fund is similar to an emergency fund, but it’s a smaller amount to cover smaller, unexpected out-of-pocket costs. This can include a broken household appliance, medical costs and other health services, a traffic citation, an auto repair and more.
This small fund, generally $500 to $1,000, helps prevent smaller financial burdens from becoming lingering financial distress.
7. Keep up with maintenance
While the nickel-and-dime maintenance that some household items need can seem like a burden, they actually prevent the larger burden of a complete breakdown. So, try to perform the recommended preventative maintenance on things like your car, home air conditioning, washing machine, dishwasher, swimming pool and others to ensure their functionality remains consistent.
This can also include personal maintenance, like preventative health care. Make sure to have regular check-ups with your doctor at an annual physical, as well as dental and vision exams. This not only helps increase your quality of life, but medical care is generally less costly the earlier you catch an issue.
8. Get quality health insurance coverage
Healthcare costs can become massive financial burdens, as they can involve costly specialist visits, surgeries and other procedures. A quality insurance policy, including a dental, vision and health policy, can help mitigate the impact of the high-cost health system.
With a health policy, you will pay monthly premiums for coverage. Generally, these policies will include coverage for primary doctor visits, specialist visits, nursing costs and prescription drugs once you reach your required deductible — the out-of-pocket expenses you must pay before the policy benefits kick in. Some insurance plans offer doctor visit benefits where you pay only a fixed copay or coinsurance before your healthcare spending reaches the deductible amount.
A big part of the decision-making process when finding the right health insurance coverage is to balance the monthly premium costs, deductibles, out-of-pocket maximums and other expenses. You then try to match them to your anticipated medical needs.
For example, if you’re single with no dependents and are in good health, a high-deductible plan with low premiums may work for you. However, if your family has a prevalence of medical issues, such as a history of cancer patients in your family, or has existing conditions, it may be beneficial to pay higher premiums for a lower or even $0 deductible.
Another option is to lower your premiums by opting for a high-deductible health plan (HDHP) and enrolling in a health savings account (HSA). You can save tax-free dollars in your HSA, then use that savings to cover medical expenses. You won’t pay taxes and penalties on the cash you use for qualified medical expenses, which can be anything from acne products to surgery. An HSA can only be used in conjunction with a qualifying HDHP.
Some people will choose an HDHP instead of a low-deductible plan, then deposit the difference between the monthly premiums into the HSA, giving them greater control of their cash. They can even withdraw it in an emergency for unapproved or non-health-related reasons, but they must pay income tax and a 20% penalty on the withdrawal. And once an HSA reaches a specific dollar amount, you can invest the savings and earn interest. The investment threshold varies based on the HSA administrator’s policies.
An additional benefit of an HSA is once you turn 65, you can withdraw cash from it for anything — even nonmedical expenses — without penalty. You’ll only pay income tax.
Remember, private insurance isn’t your only option either. If you are a low-income household or at least age 65, you may qualify for public health insurance, Medicare or Medicaid. Medicare is a Social Security tax-funded program for seniors 65 and older, whereas Medicaid is based on financial and medical conditions.
Both programs may charge monthly premiums but are generally far lower than private coverage. Medicare Part A is free, but the expanded Part B is income-based and costs $170.10 to $578.30 per month in 2022.
If you’re considering a health insurance change, keep in mind you can only enroll during an open enrollment period unless you have experienced a qualifying life event. Open access to sign up for health insurance occurs between November 1 and January 15 in most states, but some can vary.
Ease the impact of a financial burden with proper preparation
Financial burdens can happen to anyone, whether it’s a small repair on a car, a medical bill or a complete loss of income. The best defense against a potential financial burden is to be prepared by increasing your surplus cash flow, cutting debt, lowering interest rates, building savings, maintaining yourself and your household goods and mitigating against high medical costs with health insurance.
By managing these areas, you can better position yourself to shoulder a short- or long-term financial burden and overcome it easier.
If your credit card debt has you concerned about your ability to navigate a financial burden, the Tally† credit card debt repayment app can help. Our app helps you manage your credit card payments, and Tally offers a lower-interest personal line of credit, allowing you to efficiently pay off higher-interest credit cards.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 to $300.