6 Ways to Protect Your Finances from the Unexpected

From dealing with an emergency vet visit to needing to make a significant home repair, you never know when you’ll be faced with an unexpected — and expensive — event. 

If you’re in a situation where you need additional funds right away, you could consider taking out a personal loan from a bank, credit union or online lender. A personal loan can be used to cover a variety of life events, and it is often a good alternative to a credit card due to the convenience of a fixed repayment term and a potentially lower interest rate.

But it’s also smart to plan ahead. Keep reading for six ideas to protect your financial health, from creating a budget to building an emergency fund to paying down debt.  

Get familiar with your finances

The first step toward protecting your finances is to get clear on how much money you have and where it’s going. Track your spending in a spreadsheet, on a piece of paper or with an app on your phone. 

Ask yourself the following questions: How much money do you have coming in and going out? How are you spending on must-have items — rent or mortgage payments, car payments, groceries and gas — versus nice-to-have items like streaming subscriptions, gym memberships and dining out with friends? Where can you cut back to save or invest more?

Tracking your money is also a good way to gather vital information about all your accounts — checking, savings, investments, loans and so forth — in case of an unexpected event. Keep this information together in a folder or somewhere you can access it easily. 

Create a budget — and stick to it

Once you have your financial information in one place, you can use it to create a budget to keep your spending in check and work toward your savings goals. The 50/30/20 method is one way to organize your money into essential items (50%), wants (30%) and savings (20%), but there are plenty of other methods as well. The best budgeting system is one that you can stick to. 

Getting clear on how you’re allocating your money and where it’s actually going could free up more funds to add to an emergency fund or pay down debt. 

Build an emergency fund 

Beyond your primary savings account, it could be helpful to have a separate emergency fund to help protect your finances. The goal is not to touch the money in your emergency fund unless you absolutely need it. 

Experts typically recommend saving at least 3-6 months' worth of rent or mortgage payments in an emergency fund in case of job loss or another unexpected event. If your budget is already stretched thin and you want to add more money to your savings or emergency fund, you could look for a side gig or find additional work as a freelancer. 

Consider opening an emergency fund in a high-yield savings account, which typically pays higher interest than a traditional savings account to help grow your money.

Pay down debt 

While paying down your debt could take time, it’s an important way to protect your finances in the long term. Having too much debt, not being able to pay your bills or making late payments to your lenders due to tight funds could all impact your credit score. Damaging your credit standing could then affect your ability to borrow money in an emergency. 

Additionally, carrying too much debt, particularly at a high interest rate, could eat up money you could otherwise save, invest or spend on hiring a financial advisor, for example, to help you better manage your finances. 

Plan for your future

Prioritizing your retirement savings is a good way to protect your financial future. Planning for retirement and contributing to a 401(k) plan through your employer or setting up an Individual Retirement Account (IRA) are valuable ways to invest in your future self. 

A financial advisor could also help you figure out how much you should be contributing to your retirement each month, as well as help you understand the tax implications of different types of retirement savings accounts. 

Sign up for insurance 

Taking out insurance policies to protect your most valuable assets should be at the top of your list as you look to safeguard your financial health. There are many different types of insurance for your home, vehicle, health and life. Do your research and find policies that work for your budget.  

Prioritize protecting your finances  

There are many steps you can take to protect your finances in case of an unexpected event. Take a hard look at your income and your budget, and focus on saving more, paying off debt, investing wisely and finding insurance that can help protect your whole life.