Dealing with an emergency is challenging, but there is also an important process for getting back to normal after an emergency has passed.
Mostly everyone has some experience of what it’s like to deal with an emergency. The pandemic has made sure of that.
But in case you haven’t, let’s talk about the finances of an emergency.
You’re going along, making money, doing your best, executing your financial plan. Maybe you’re paying off debt, or saving for retirement, buying a home, or any number of those big financial tasks that comprise our financial lives.
And then, boom! An emergency hits. Maybe it’s a medical emergency. Maybe it’s the loss of a job. Maybe it’s some other changed financial situation.
(Want to know if something is really an emergency?)
An emergency is rarely an “event”; it’s more of a process. Yes, you might have lost your job, but you’ve got months where you had to find a new one, and maybe weren’t earning any income during this time.
But we’re resilient creatures, and emergencies don’t usually last forever. So let’s say that you’ve gotten to the end of your emergency.
What then?
There is a process to forging forward in your financial life after the emergency has passed, to help you getting back to as close to “normal” as you can.
Table of Contents
Undo your emergency measures
The first step in getting to a post-emergency situation is to undo, or reverse, any emergency provisions you put in place.
For example, in a job loss, if you’re not earning income for a period of time, you probably had to resort to other ways to make ends meet. These could be some combination of:
- Draining your emergency fund / savings
- Racking up credit card debt
- Borrowing money from family/friends
- Taking a loan from your retirement account
- Rent/mortgage relief programs
The list is unfortunately longer, but you get the idea.
Now, on the other side of your emergency, let’s say you have money coming in now. Here are the steps:
- Deal with home and basic needs first. So, for example, start by getting current with your rent and mortgage, if applicable.
- Pay back any debts incurred. So if you borrowed money from someone, pay them back as soon as you can. As long as you’re current with your debts, use the Debt Snowball method to figure out who gets paid first.
- Refill your savings. Did you spend down $10,000 of your savings? Well, get that built up again. Pause on retirement contributions (okay, unless your employer offers a match, in which case, just that) and get that emergency fund back up again.
If your emergency involves a big bill (such as a medical bill) that you now owe, then your job is to just roll it into your larger financial plan. Which is what the next section is about.
Assess your preparedness
It would be great if you could get a certificate that said “the bearer has completed their emergency and is now excused from future emergencies“. But that’s not the world we live in.
So you want to take some time to assess whether your preparedness was sufficient. What worked, and what didn’t? What were you able to rely on? How much were you really able to live on when you needed to cut expenses?
If you found that you didn’t have enough emergency fund, then that’s a good sign to perhaps build that a little bigger than it was before. I always say six months of living expenses, minimum. If you don’t have five figures in emergency fund, it’s not enough.
It’s one thing to think about what a theoretical emergency would look like. But now, you’ve got real-world experience in your hands (and thankfully, in the rearview mirror) so you should be able to plan more effectively.
Recommit to your financial plan
After you tackle the above tasks, you should, insofar as one can, be back to where you were before the emergency hit.
Only now do you recommit to your plan.
I’ve talked about “financial cage matches” before, how to figure out what to do in what order.
But in general, I recommend dealing with debts and saving before dealing with investments. Think of wealth like a number line; you have to get out of the negative before you move to the positive.
So commit to paying off your debts and building up your emergency fund. (You can hold off on a mortgage until later, since that’s a longer process.) Once there, then I recommend the 15% rule for investing for retirement.
Do these things in order! Don’t try and do sixty different financial tasks at once. You won’t get anywhere at all.
Congratulate yourself
Going through an emergency is difficult and painful, and the associated financial challenges that often go along with the emergency just make things harder.
But if you’re on the other side, know that you did it. However difficult or awkward, and no matter how things could have gone differently, you still made it through. You should take some time to congratulate yourself about that.
Should another emergency come your way, you will be better prepared to manage it effectively. My hat is off to you.
