Financial Emergency

Financial emergency summary: 

• Financial emergencies are unexpected events that create sudden need for extra money.

• Financial emergencies could be a loss of income or a significant unexpected expense.

• Having an orderly process for dealing with financial emergencies could help put you back in control.

Financial Emergency Definition and Meaning

No matter how carefully you plan, every now and then a financial emergency can throw those plans out of whack.

The timing and nature of these emergencies tends to be unpredictable. However, anticipating what types of emergencies might arise could help you get control of these situations.

Key Attributes of a Financial Emergency

The attributes that define a true financial emergency are:

• Unpredictability

• Need

• Size

A financial emergency by its very nature is unpredictable. A financial emergency creates real financial need, at a cost that’s larger than your ordinary income would easily cover. 

A financial emergency always seems to happen at the worst possible time. Then again, there’s never really a good time for unexpected financial problems. 

Many financial emergencies aren’t anyone’s fault. They are often just one of those parts of life that’s sometimes unavoidable. However, you can control how you respond. 

Types of Financial Emergency

Broadly speaking, a financial emergency can take one of two forms: a loss of income or an unexpected expense. 

Loss of income

A loss of income is hard to plan for because it is open-ended. You might not see it coming or know how long it will last. 

A loss of income can occur for a variety of reasons such as:

• Loss of a job

• Having your hours cut

• Being forced to take on work that pays less

Unexpected expense

There are many different kinds of unexpected expenses. One thing to consider is that if you own more stuff, you might have a greater chance of experiencing an unexpected expense. For example, a homeowner with two cars has more things that could break or need maintenance than a renter who gets around on public transportation.

Another thing to consider is the age and condition of the things you own. A car with 150,000 miles has a better chance of needing a sudden repair than a car with 50,000 miles. Older appliances are more likely to need replacing than newer ones. 

Some unexpected expenses that commonly affect people include:

• Medical bills

• Car trouble

• A major repair to home or other property

• An unexpected need to travel, such as for a funeral or to help care for someone

Financial Emergency: A Comprehensive Breakdown

You can’t predict when or how financial emergencies will strike, but you can be prepared to take an orderly approach to dealing with them. This should include:

• Assess the cost. 

• Figure out the most cost-effective way to pay for the emergency. Having an emergency fund can help.

• Make a recovery plan. This may include rebuilding savings or paying off debt you took on to pay for the emergency.

When an emergency first happens, it’s normal to feel a little helpless. Having this type of process for handling it could allow you to feel more in control.

Real-Life Examples of Financial Emergencies

To illustrate how financial emergencies can play out, here are two real-life examples.

Financial emergency from job loss

Bob is unexpectedly laid off. He lives alone, so he’s the sole source of household income. He can respond in two ways. 

First, he can aggressively start searching for new work. If the job market doesn’t look promising, he may need to take on something temporarily until a more suitable opportunity comes up. 

Second, Bob should cut spending. If possible, he should try to make ends meet without depleting his savings or running up debt. Ideally, these spending cuts will be temporary.

Financial emergency from unexpected expense

Sally’s car breaks down and needs a new transmission with a steep $5,000 price tag. She has $2,000 in savings. She needs to get the car back on the road quickly, so she withdraws the $2,000 and charges the remaining $3,000 on her credit card. She also starts shopping for a debt consolidation loan at a lower interest rate she can use to pay off the credit card debt.