Life never runs out of surprises, be it good or bad. That’s why you need to have a financial backup plan that will help you weather any storm.
You may be the most disciplined person when it comes to sticking to a budget and saving a portion of your income every month, but unexpected events may occur that can render you in financial ruins, especially if you don’t have a plan B.
Here are the steps you need to take to create a financial backup plan that will prepare you for the future.
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Track your Current Expenses
Before anything else, it’s important for you to know how much you need on a daily or monthly basis. Evaluate your current and future financial situation.
How much do you currently spend every month? Separate your expenses into categories to easily visualize which ones you can trim down to lessen your expenses. This will also help you determine the amount you need each month versus the amount you want to spend including leisure activities.
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Predict Future Expenses
If you have children, the amount you’re spending now will not be the same in the coming years. You may need more or less depending on the age of your child, so predict expenses for the future to know if your current income is sufficient to accommodate your family’s future needs.
Future additional expenses may include your child’s education, wedding expenses, or if you plan to give them a car. If your child will soon go off on their own and you don’t need to pay for the expenses mentioned above, then you may need less in the future, giving you more money to place in your retirement fund.
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Consider the Possible Scenarios
Let’s say your plan A is to retire at the age of 60, with all your children and loved ones independent of your financial support. You’ve calculated your financial situation, and you know that when that year comes, you will have enough to get you through the rest of your life.
However, you need to take into consideration that unexpected events such as natural disasters, accidents, severe illness in the family, job loss, economic slowdown, lawsuits, divorce, and other tragedies can occur and render you in financial ruins when you’re unprepared.
Are you insured? Do you have a retirement fund and an emergency fund to help you cope with such events? Is it enough? Write down the backup plan for each situation.
Once you’ve tracked your expenses properly and outlined your family’s future expenses; you know how much you and your family need every month. Calculate how long you can survive with your emergency fund should a disaster occur.
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Get Insured and Understand your Insurance Policy
If you’re not insured yet, then it’s time to start looking for an insurance plan that will cover your particular needs. Make sure you have an insurance plan that can cover you, your family, your vehicles, your properties, and your health.
Memorize the important details in your insurance policy. Ensure that your family members know who to call when an emergency arises, and you need to claim your insurance.
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Evaluate your Current Financial Situation
Audit yourself and make an inventory of your possessions. What assets do you have? How much is your net worth? Look through your closet and assess your valuables—from real estate properties, cars, jewelry, designer items, and other valuable items that can be resold. Organize them and keep a list of your assets.
This will be helpful for you especially if you think that if a tragedy occurs, your emergency fund will not be enough. Should that happen, you know exactly which item to sell to a friend or an online pawning site. You may be surprised by how much you can get from your jewelry or designer handbags.
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Complete the Paperwork
Getting all the paperwork in order may be a tedious task, but it’s something you shouldn’t put off, especially if you have dependents counting on you.
Make sure that should anything happen to you, your family members know where the documents are. This includes your will, property deeds or titles, insurance policies, bank books, and the like. Consult with an attorney or a professional if you find it too daunting.
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Practice Good Financial Habits
Achieving financial independence takes a lot of discipline, and bad financial habits will not help you build an emergency and retirement fund.
Good financial habits you need to develop may include saving a portion of your salary, living within your means, avoiding unnecessary expenses, and tracking your expenses.
When you practice good financial habits, you can develop the financial discipline that will largely contribute to your financial success in the long run.
Every person has their own goals and dreams in life, with individual financial plans and strategies. Nonetheless, it’s important for everyone to know and understand their financial situation to be able to create appropriate financial plans.
While your ultimate dream is your plan A, you should also make sure that you have a plan B (and maybe even a plan C) so that you’re prepared for anything.
Break your bad financial habits now and ensure that you have a backup plan that won’t leave you in financial ruin.