Building a financial contingency plan is a step-by-step process. The good news is: these are all within a person’s control—and have positive side benefits of lower stress and anxiety.
1.Know how you’re spending your money.
Rather than guess, start to know where your money goes every month. To get started, collect your last month’s bank and credit card statements, and make a list of how much you spent on:
Big items like rent, loans, food, utility bills, and credit card payments
- Incidental items like clothing, gas, haircuts, take-out food, etc.
- Insurance payments (such as car or life insurance) that may occur quarterly or annually
- Miscellaneous purchases
- What you paid yourself via a savings account
2. Set priorities through a realistic budget plan.
A budget puts you in charge of your spending, helps you set financial priorities, and empowers you to take control of things you can control.
The 80/20 rule works for many people—set aside 20% of your income for savings and live off the remaining 80%. If you get discouraged as you work through this process, remember the end goal is to build an emergency savings fund as part of your financial contingency plan.
3. Check your credit score.
A credit score is a number between 300 and 850 that represents the creditworthiness of an individual. This score primarily is based on a borrower’s credit history gathered from a number of sources. Scores of 670 – 749 are considered to be “average to good” credit scores.
Credit reports are available free by request and through technology tools such as Penn Community Bank’s Savvy Money app. Any information you find that’s either inaccurate or incomplete should be addressed immediately.
4. Cultivate new savings habits.
By staying home in 2020, many people saved money on gas, restaurants, office vending machines, travel, clothing, and more. They learned it was possible to put a few dollars away each week without a lot of sacrifice, and so can you with the applicable credit agencies.
Another smart savings habit is to have money transferred automatically into your savings account every month as part of your financial contingency plan.
How much you save versus repaying debt may depend on your priorities and debt-to-income ratio. For instance, if your ratio is lower, then building your emergency savings fund more quickly makes sense. If it’s higher, you may be better off saving a little less and instead repaying debt.
5. Manage high-interest debt.
High-interest debt typically is any loan or credit card with interest rates higher than 7%, and many personal loans and credit cards are much, much higher than that. Here are two good ways to reduce your debt based on which feels best for you:
Focus your efforts on the credit card or loan with the highest interest rate, while making only minimum payments on the rest. The goal is to get that debt paid off as quickly as possible, because it’s costing you the most. Then pay down the next highest rate debt, and so on.
Focus on your smallest debt to pay it off more quickly, while making only minimum payments on the rest. Once the debt is paid off, use that money to eliminate the next smallest debt—and keep the “snowball” effect going.
To calculate your debt-to-income ratio:
Your debt-to-income (DTI) ratio is a personal finance measurement that compares your monthly debt payments to your monthly gross income. Your gross income is your pay before taxes and other deductions are taken out. The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.