Whether it's a small mishap, such as a fender bender or a big life event, such as a medical diagnosis, you'll likely encounter an unexpected challenge at some point in your life.
Not only do these curveballs take a toll physically and emotionally, but they can also jeopardise your financial well-being.
While there's no way to predict when you'll face a crisis in life, having contingency plans set up as part of your financial plan will protect you and your loved ones financially as you face these challenges.
Here are some things you can do to prepare you and your loved ones financially to deal with life's unexpected challenges.
Make sure you have an emergency fund
Before contributing to pockets of cash reserved for your investments, you should already have a well-stocked emergency fund in place.
Having an emergency fund allows you to undertake the unexpected costs of an emergency without reducing your monthly investment contributions or liquidating your investments.
These unexpected expenses add up over time and if you make it a habit to use money reserved for your investments to pay off an emergency, you could potentially derail your long-term financial goals.
Think of your emergency fund as a way to guarantee some peace of mind financially while you deal with the physical, emotional, or logistical aspects of an emergency.
To cushion yourself in the short term, we recommend having an emergency fund that covers at least 6 months of your living expenses.
Prepare for larger life risks with insurance
Major incidents, such as property damage, permanent disability, illnesses, or death can cost hundreds of thousands of dollars, which is more than what your emergency fund can cover.
You should never have that much money in cash either.
So, it's vital to have insurance that appropriately reflects and protects your particular life circumstances to maintain the integrity of your other finances while also taking care of yourself and your loved ones.
Keep in mind, you should only pay for just enough insurance coverage given your life circumstances.
For instance, if you're a single working adult, you don't need to purchase a high-coverage life insurance compared to someone who's married with children.
If you own a home, make sure you have homeowners' insurance; when you travel, have travel insurance.
These relatively small premiums on the things you value are minor compared to what you'd be paying if your health, life, or property were compromised.
In addition, insurance should only be used for protection, not as an investment. Investment-linked insurance policies (ILP) typically cost you more in premiums, and carry market risks that expose you to market volatility.
Unlike traditional insurance, your ILP premiums go towards purchasing investment funds rather than paying for your insurance coverage.
The last thing you want is to find out that you don't have sufficient coverage to pay for a huge medical bill because most of your premiums went into an investment.
Just as you would do with your investments, take the time to understand the type of insurance you should be buying, how much you should be paying for your premiums, and how much you should be covered for based on your life circumstances.
Plan for your loved ones' future
Part of providing the best for our loved ones means having legal mechanisms in place to prepare you and your loved ones for the unlikely event that you're faced with a terminal illness, or unexpected death.
In addition to owning life insurance, also having an advanced medical directive and a will can further reduce your loved ones' legal and financial burdens during an emotionally trying time in their lives.
An advanced medical directive (AMD) is a legal document informing your doctor that you don't want any extraordinary life-sustaining treatment to prolong your life in the event you become terminally ill, and unconscious.
An AMD takes the emotionally traumatic life and death decision out of the hands of your loved ones and puts it firmly in your own hands.
]And, a will makes sure that your assets are distributed to your loved ones based on your wishes.
With a will, you're not only setting up your loved ones financially for after you're gone, but you also reduce any potential familial disputes that could affect the well-being of your loved ones.
Remember, sound financial planning should also encompass a well-rounded legal strategy that prepares you and your loved ones for these life-changing events.
Create passive income streams
Setting up an emergency fund, buying insurance, and creating a will and an AMD are the first steps towards preparing for life's unforeseen challenges.
You can take your preparation one step further by creating some passive income streams.
If you unexpectedly lose your main source of income, your passive income stream acts as a contingency plan; you'll still have a regular income thanks to the passive income streams that you've set up.
Investing in an income portfolio, or investing in real estate, or publishing a novel are some ways you can diversify your income stream so that you're not solely relying on your day job for your income.
Facing life's challenges with preparation
The last thing you want to worry about while dealing with an unexpected life event is your financial well-being.
So, it's crucial to plan and prepare for the possibility that these events might happen by having the right financial and legal mechanisms as part of your overall financial plan.
Your preparation will help you navigate a stressful time in your life with more ease, and allow you to stay on track to achieve your long-term financial objectives.
This article was first published in Stash Away.