Oct 01, 2019  | Tags: contingency planning, budgeting

Our Insights

Don’t have a contingency plan for your financial situation? Time to get one.

Why You Need a Contingency Plan

You just never know what life will bring. You could have a solid plan for building your wealth, a stable job and great health. But none of those things can provide 100% protection against the unexpected.

A car accident. Illness. A natural disaster. Theft. Economic downturn. The only protection against the unexpected is a financial contingency plan.

Having the fallback of a contingency plan will help you to stay calm and feel secure even when financial hardship strikes. 

Even living on a careful budget can’t protect you when you suddenly lose the ability to earn income. That’s why you need to have contributions to your contingency plan factored into your budget.

How to Build Your Contingency Plan

Plan for the worst.

Try to anticipate the kind of costs you would face in an emergency. Add up all those potential expenses to get a baseline of the amount you need to set aside in your emergency fund. The amount of cash you need will depend on your circumstances.

For example, will you need funds to book a last-minute flight? Money to repair your home after a storm or fire? Cash to keep your family fed if you end up without work for several months? 

Determine in advance what kind of financial impact an emergency would have on your family and then make it a goal to set aside even more than that amount in your emergency fund. As a general rule of thumb, you should have enough funds set aside to take care of your family’s expenses for 3-6 months in case you have no regular income over that length of time.

Adjust your contingency plan, as needed.

Revisit your contingency plan and emergency budget from time to time to make sure it’s still appropriate to your needs. If you experience a big life change (like marriage or divorce, the birth of a child, buying a new home or changing careers), then you’ll need to make sure that your contingency plan factors in those new changes.

Identify where you can cut back.

Perhaps you can afford to eat out a few times a month, right now. But that’s a luxury that may have to go if you suddenly lose your job. If you can identify those areas where you can cut back before hardship hits, then you’ll be prepared to make those needed cuts.

You should also note in advance whether there will be any cancellation fees associated with stopping certain payments or services during the time you need to tap into your contingency fund. Being prepared will help you minimise stress and frustration.

Keep your emergency fund somewhere safe.

Your emergency cash should be liquid for quick and easy access so you don’t need to sell your investments and expect quick money. But similarly should those dedicated funds be within easy reach. 

Remember, an emergency fund is for true emergencies, not for those times when you want a little extra spending money.

The best way to build and protect your emergency fund is in a savings account, and this should be a key part of your contingency plan.

Set up automatic deposits to your emergency savings account.

It’s easy to forget about your emergency fund when things are going well. You naturally want to spend your income on yourself and your family when you have cash coming in. But it’s important to regularly make contributions to your emergency fund during those times of plenty. Setting up an automatic deposit to your savings account will ensure that your fund grows even if you’re inclined to forget about it.

Reduce your debts.

By avoiding unnecessary debt now, you can prevent feeling overwhelmed or panicked if your regular income abruptly dries up.

The same goes for when you find yourself in a financial emergency. If you have an emergency fund set aside that you can tap into instead of turning to credit cards, then you’ll feel much less stressed.

Have adequate insurance.

Personal, life and health insurance are extremely important to have in an emergency. You need to take out the policies long before an emergency strikes, however. So if you need help choosing adequate insurance cover or designing a budget for your contingency plan, contact the team here at Calder wealth Management.

Get Advice

Talk to th experts at Calder Wealth Management. Call us on (08) 8373 3333 to schedule your free initial appointment. 

Written by Ben Calder at Calder Wealth Management.