Many people struggle with managing their money. Sometimes, there just isn’t enough to go around. In fact, over 900,000 Americans filed for bankruptcy in 2014. You might think that those who file for bankruptcy are irresponsible spenders. That’s certainly some , but in reality many people are not excessive over-spenders. They’re simply unable to respond to unfortunate events.
According to a 2010 study, the top 5 reasons why people file for bankruptcy are:
- Medical expenses (42%)
- Job loss (22%)
- Uncontrolled spending (15%)
- Divorce (8%)
- Unexpected disaster like earthquakes, floods, and hurricanes (7%)
None of us want bankruptcy to happen to us. And yet, many people face illness, job loss, divorce, and natural disasters every year and it decimates their finances.
It’s difficult to recover after the fact, but you can take steps now to mitigate these financial disasters. Let’s go into some ways to prepare your finances for the unexpected.
You Need an Emergency Fund
An emergency fund is an essential tool to protect your finances from financial disaster. In fact, the lack of an emergency fund is probably one of the top actual reasons people go bankrupt. Sure, crazy expenses creep up and you might not know what they’ll be, but if you had a bunch of money set aside for a potential financial disaster, then your odds of bankruptcy will be severely reduced, plain and simple.
An emergency fund of 3 to 6 months of expenses is often recommended to help with job loss. But when determining how much you’d like to keep in your emergency fund, consider the deductibles on your health insurance, home insurance, and auto insurance as well. Make sure you have enough on hand to pay those deductibles, should the need arise. And, when building up your emergency fund, be sure to keep the funds in a safe place that’s easy to access, like a high interest savings or checking account.
One of the other main reasons people go bankrupt is due to inadequate health insurance coverage. Many don’t realize it, but health insurance is a major part of protecting your finances. If you or a family member gets seriously ill, medical expenses will pile up quickly. At this point, just 87.1% of Americans do have health insurance, but with the introduction of the Affordable Care Act, the number of uninsured Americans is dropping.
Still, many health insurance plans do have a deductible before covering 100% of medical expenses. In order to protect your finances, you’ll want to make sure you have the money to cover the deductible.
There are also many other expenses that come with a sick family member, including missing work, in-home care, and even making accommodations to living spaces. Emergency funds can help mitigate the damage here as well.
Other top reasons people go bankrupt are due to a lack of home and auto insurance. No one likes to think about a flood, fire, tornado, or other natural disaster, but the consequences of being unprepared for disasters like these is enormous. Home and auto insurance helps mitigate the damage tremendously.
Homeowners often have hazard insurance, as required by their mortgage lenders, to protect the home and its contents from damage. Comprehensive homeowner’s insurance adds liability protection. But many policies have exclusions for natural disasters. If you live in a high risk zone for flood, earthquakes, and so on, you may need to purchase additional insurance. Many times, it’s a wise idea to go ahead and cover these exceptions.
Auto insurance acts in a similar manner. All legal drivers are required to have liability insurance to protect against injuring another person or their property in an accident. You can purchase collision insurance to protect yourself and your vehicle in an accident. Comprehensive insurance will cover damage due to hail, theft, and so on, though there are often exceptions like with home insurance.
Track Your Spending
While most bankruptcies are due to unfortunate events, some are due to overspending. It’s much more difficult to ignore any excessive purchases when you monitor your spending. Even if you suffer hard times from illness, job loss, or a divorce, you’ll need to understand your finances to be able to react appropriately to your new financial situation.
Use a spreadsheet, a budgeting program like You Need a Budget, or an online spending trackers like Mint.com and PersonalCapital.com. Programs like these help organize information about your financial life. Without this information, it’s hard to know when you are in financial trouble — or what to do about it.
An article about preventing financial disaster wouldn’t be complete without mentioning life insurance. If you have people who rely on you financially, you need life insurance. If the worst happens, your family will be vulnerable to any further disasters like illness, job loss, and more. Term life insurance is usually very affordable and well worth the price.
The Bottom Line
Illness, job loss, divorce, and natural disasters do happen. If fact, you probably know a handful of people that have been affected by these, so why couldn’t it happen to you? Are you financially prepared for it? By preparing in advance with insurance, an emergency fund, and good financial habits, you’ll be financially prepared to face unfortunate events.
Do you now understand why people go bankrupt? Will it happen to you?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.