How to Prepare for Financial Hardships and Unpredictable Markets

You may be exposed to several financial hardships in your life. While it is common to plan for significant financial goals, such as buying a home or retiring comfortably, the hurdles in life are what catch you off guard. These unforeseen events can leave you scrambling for stability without thorough financial preparation. While no one can predict the future, you can build a financial safety net to prepare for the unknown. Identifying potential risks and having a proactive approach to financial planning can help you during tough times.

A financial advisor can help you plan for potential hardships in life. This article will also point out some events you need to save money for to ensure you do not derail your progress.

What is financial hardship?

A financial hardship is an unexpected event or situation that forces you to spend more money than you have or can reasonably afford. These events are typically unplanned and unanticipated and can create a significant strain on your financial resources.

Financial hardships can arise from various circumstances, such as medical emergencies, job losses, or unexpected repairs, and they often have a ripple effect on your long-term financial security. Unpredictable markets can also disrupt your financial plans. A sudden economic downturn or market volatility can lead to unexpected losses. Beyond the financial strain, these situations can also take a toll on your mental well-being. Therefore, you must know how to prepare for financial hardship to ensure you are not caught off-guard.

What are some events you need to save money for, and how?

1. Financial hardship: Financial emergencies due to loss of job

While you may have a steady job now, the future is never guaranteed. Market fluctuations, company decisions, or your personal circumstances can lead to sudden job loss, leaving you without a steady paycheck and no immediate prospects for employment. Job losses can stem from various causes. Unpredictable markets can disrupt industries. For instance, during a recession, many companies may not hire new people and lay off existing employees, making it harder for you to get a job.

You may also have personal health issues that prevent you from working. Sometimes, mental health challenges can also force you to quit your job. For entrepreneurs, a significant business loss can mirror the same financial instability as losing a job. No matter the cause, loss of income can severely impact your current financial stability and create long-term challenges if not managed wisely.

Solution: Maintain an emergency fund

An emergency fund is your financial lifeline in such situations. Finding a new job can be time-consuming. Markets may also take time to recover. In the meantime, an emergency fund can provide a cushion to cover your essential expenses while you seek new employment opportunities. Here’s how to build and use an emergency fund effectively:

• Save three to eight months of expenses: Aim to keep at least three to six months’ worth of living expenses in your emergency fund. If possible, extend this to eight months for added financial security.
• Use liquid accounts: It is important to store these funds in easily accessible accounts, such as a high-yield savings account or a money market account. This ensures that you can quickly access the money when needed and do not have to wait for days looking for the right opportunity to liquidate your assets.
• Withdraw only for emergencies: Use the fund strictly for genuine financial emergencies like job loss or other financial emergencies. If you keep dipping into your emergency savings for routine expenses, you will compromise its value.
• Replenish immediately: If you withdraw from the fund, you must prioritize rebuilding it as soon as you start earning again. This is essential to prepare you for a future emergency.

2. Financial hardship: Unexpected medical expenses

Everything could be going right, and a sudden accident or an unforeseen illness can lead to significant financial strain. Medical expenses can spiral out of control, leaving you feeling financially vulnerable. Chronic lifestyle-related illnesses may require long-term medication, while unexpected surgeries or treatments can rack up substantial debts.

Economic downturns can also indirectly influence your healthcare expenses. If you are unemployed or have reduced employer benefits during rough times, your out-of-pocket costs for medical treatments will increase. Therefore, planning your healthcare finances with these scenarios in mind is essential to ensure that you do not compromise your health.

Solution: Plan for healthcare expenses

If you are wondering how to create a financial plan for unexpected medical expenses, here are some practical steps to ensure you are prepared:

• Use employer-sponsored health insurance: If you are employed, make sure you take full advantage of any employer-sponsored healthcare plan. These plans often provide comprehensive coverage and help you manage all healthcare costs, right from preventative health check-ups to emergency medical expenses like surgeries and other treatments.
• Buy a personal health insurance plan: If you are self-employed, unemployed, or lack employer-provided insurance, you must invest in a personal health insurance policy. These plans ensure ongoing medical coverage and protect you from medical expenses, irrespective of your employment status.
• Keep emergency savings: You can dip into your emergency fund to cover any immediate medical costs. However, it is important to note that while your emergency funds can provide temporary relief, they may not be sufficient to cover extensive medical costs, especially considering the rising medical inflation. Therefore, you must only use them as a supplement to your insurance.
• Plan for retirement healthcare needs: Medical expenses can cause a lot of financial strain in retirement. You can plan for these expenses in advance through Health Savings Accounts (HSA) and Medicare. If eligible, you can contribute to an HSA to save for future medical expenses in a tax-advantaged manner. Additionally, take the time to understand different Medicare options and enroll in a plan that suits your healthcare needs. It is also essential to buy long-term care insurance to cover the costs of extended care services, which Medicare typically does not include. These can include nursing homes, assisted living facilities, etc.

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3. Financial hardship: Market downturns

The market is beyond your control. You may suffer losses when the market goes down. Even though these losses are only realized when you sell your investments, the timing of a downturn can severely impact your financial plans. For example, if you retire during a bear market, your nest egg could shrink. Or, if you are attempting to buy a house in a depressed housing market, your purchasing power will be diminished.

Solution: Make sure that your portfolio is well diversified and stay invested for the long-term

The right investment strategy can help you overcome fluctuating market conditions. Here are some things you can do:

• Diversification: A well-diversified portfolio can help mitigate market risks. Different investments will react to market ups and downs differently. For instance, if stocks are underperforming, bonds might provide stability. Gold often retains or increases its value during stock market downturns as a non-correlated asset. Treasury Inflation-Protected Securities (TIPS) can offer returns adjusted for inflation and protect your purchasing power. Even within equities, investing across different sectors, such as technology, healthcare, real estate, etc., can reduce the impact of a downturn in one area.
• Maintain a long-term perspective: Market fluctuations are more pronounced in the short term. Maintaining a long-term view allows time for your investments to recover and grow. Historically, markets tend to bounce back after periods of decline. So, try to keep a long-term investment horizon.
• Plan strategic withdrawals: Timing your withdrawals is critical to ensure you make the most of the prevailing market conditions. You can consult a financial advisor to create a withdrawal strategy that aligns with market conditions and minimizes the impact of downturns. Additionally, drawing funds during a market high rather than a low can preserve your portfolio’s value.

4. Financial hardship: Repairs and replacements

Repairs and replacements can be unexpected expenses that you may not be prepared for. A storm could damage your roof, a flood might incapacitate your car, or an accidental mishap could break your porch railing. Even pets and playful children can inadvertently cause damage, such as broken windows or scratched walls. Beyond these, you might face events like a robbery or a break-in, all of which can demand immediate financial attention. These expenses can seem more challenging to cover during high inflationary periods. Sometimes, market conditions may push the price of certain products and services, making it hard to carry out basic repairs and replacements.

Solution: Routine maintenance and adequate insurance

Being prepared for minor and major repairs and replacements can help you if you face sudden financial hardships. Here are some things you can do to be mentally and financially ready:

• Routine maintenance: Proactive care can save you from significant expenses later. Make sure to regularly inspect your home for wear and tear, such as leaks in the roof or broken pipes. Fixing small problems early prevents them from escalating into costly repairs later. Service your car regularly to address minor issues before there is any major breakdown.
• Buy the right insurance coverage: It is important to assess your assets and the risks they are vulnerable to and invest in appropriate insurance policies. You can buy homeowner’s insurance that covers damages to your home caused by events like storms, fire, or theft. Additionally, you may need car insurance to protect yourself against repair costs due to accidents, floods, or other unforeseen events. You can also consider jewelry insurance. This can offer compensation for the loss or theft of your valuable items. Insurance can offer protection against inflation and help you tackle costs irrespective of the rising prices.
• Keep an emergency fund: Your emergency fund can act as a financial cushion in your hour of need. You can use it to address urgent repair and replacement needs.

5. Financial hardship: Mounting debt

During economic uncertainty, your income may reduce. A recession can lead to job loss. Additionally, you may have increased expenses, which can result in debt accumulation. Debt can affect your financial life and derail your progress toward achieving your long-term goals. You may not realize that even small debts can escalate quickly, especially if you are out of a job or experiencing salary cuts due to unfavorable market conditions. Additionally, inflation can lead to high prices, forcing you to rely on debt to make ends meet. High interest rates on debt make it even harder to cover everyday essentials.

Solution: Use credit wisely

Credit can be a double-edged sword. Using it smartly is essential to ensure it does not become a liability. Here are some things you can do:

• Be strategic with credit usage: It is important only to use credit for significant purchases like a house or car. These expenses may be essential and require a high lump sum, which can be easily covered through a loan. However, you must avoid unnecessary expenditures, such as luxury items, unless you can comfortably afford them. If you use credit cards for non-essential purchases, you must adopt a mindful approach to spending. Say, if you splurge on something today, try to balance it by curbing non-essential purchases for the next few months. This can help you maintain a balance between your wants and needs and manage your expenses prudently.
• Manage your debt repayments: If you have considerable debt, you must first prioritize paying off high-interest debt to reduce the overall financial strain. If possible, you can also consolidate all your debts into a single, low-interest loan. This can help simplify the repayment process and save on interest. It is also important to always make your repayments on time to avoid penalties and further interest accumulation. If your debt liabilities become overwhelming, you can consult a financial advisor. They can help you create a repayment plan to get rid of your debt.

To conclude

Financial hardships can be both financially straining and mentally taxing. They have the potential to disrupt your personal and professional life and even create a ripple effect of further challenges. Preparing for these challenges in advance can provide you with peace of mind and equip you to handle them more effectively when they arise. While predicting and planning for every unforeseen event is impossible, staying ready for common financial hardships, such as job loss, medical emergencies, repairs, debt, or market downturns, can make a significant difference. Moreover, you can always consult with a financial advisor to ensure you are better prepared to safeguard your financial future.

Use the free advisor match tool to get matched with seasoned financial advisors who can guide you on how to prepare for financial hardship and unpredictable markets to lessen their impact on your savings. Answer a few simple questions based on your financial needs and get matched with 2 to 3 financial advisors who may be best suited to help you.