Preparing your finances for an emergency

From a flooded basement to an unexpected surgery, emergencies can put a serious strain on your finances. It often only takes one unexpected event for meticulous budgeting and savings to be turned upside down. While predicting any emergency is impossible, taking the time to prepare beforehand can help mitigate the outcome and place you on a quicker road to recovery, both financially and otherwise.

Here are a few things to keep in mind:

Emergency Fund

An adequate emergency fund is one of the most important components of financially preparing for an emergency. Most experts recommend padding an emergency fund with at least three to six months' worth of expenses. Although an emergency might not require that much money to see you through, it only serves to add flexibility and ensure preparation.

Struggling to start the fund? Consider allotting a portion of each paycheck into an account specifically reserved for emergencies and make the contributions automatic. Knowing you have a bit of a financial cushion in the event of an emergency can help put your mind at ease.

Insurance

Securing adequate insurance and understanding the extent of the coverage is another key component of preparing your finances. While each individual should evaluate which types of insurance are best for them, certain forms, such as life, homeowners and medical can be critical components of preparing for an emergency. Life insurance, for example, can help to alleviate some of the financial burden that an unexpected death and subsequent loss of income may leave behind.

Homeowners insurance can help to protect against many common disasters including fires or theft. It's important to note that every homeowner's insurance policy is different. Some may cover just the basics, while others may cover damages caused by floods, v which may be an important consideration in many North Suburban communities.vi Make sure to analyze everything from risk factors to your geographical location when selecting a plan.

Important Documents

Take a few minutes to organize your most important documents, which can include anything from your will and insurance policies to birth certificates, credit card information and online usernames and passwords. vii The last thing you want to do in the aftermath of an emergency is scramble to get everything organized. Having all of your essential information in one safe place can help expedite and simplify the rebuilding and recovery process.

Credit

Ideally, a fully stocked emergency fund can help to cover the expenses associated with an emergency. However, depending on the situation, credit may be needed to provide immediate financial relief. viii It is important to stay up to date with credit card payments, avoid large amounts of debt and regularly check your score in order to maintain your credit options in the case of an emergency. ix A strong credit score may allot for higher spending limits and an easier time taking out a loan. If you must rely on credit during an emergency, do your best to pay off the bill in full as soon as the situation permits.

Scams

In addition to preparing beforehand, it's just as important to keep a vigilant eye out for scams after an emergency. Those who have experienced traumatic events may be more susceptible to making rash decisions because of both the chaos and desire for a quick fix. Always go through your insurance when beginning the rebuilding process and remember that if something seems too good to be true, it likely is.

Many think that an emergency will never happen to them, and if it does, that they will handle it in stride. Though financial planning is only one component to the emergency preparedness puzzle, it's a foundational piece that can help get you back up and moving in the wake of an unexpected event.

• Scott Magnesen is a managing director and financial adviser with Morgan Stanley in Oak Brook. The information contained in this column is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates.