10 Ways to Prepare for a Personal Financial Crisis

Learn how to turn potential financial tragedy into a temporary setback

Reviewed by Khadija Khartit
Fact checked by Vikki Velasquez

A personal financial crisis can strike at any time, whether due to job loss, medical emergencies, or economic downturns. Without preparation, these events can cause additional stress and financial instability. Below are ten effective strategies to help you prepare for and manage a financial crisis.

Key Takeaways

• Maintain an emergency fund to cover at least three to six months of expenses.
• Create a budget, track expenses, and eliminate discretionary spending to free up financial resources.
• Pay bills on time, reduce high-interest debt, and negotiate better repayment terms.
• Explore additional income streams and ensure adequate insurance coverage.
• Continuously adjust financial strategies to stay prepared.

1. Maximize Your Liquid Savings

Having readily available cash provides a safety net during financial crises. Setting aside money in high-yield savings, money market, or checking accounts can ensure you can access funds immediately.

Note that while the Federal Reserve no longer imposes requirements restricting the number of withdrawals people can make from their savings accounts, some banks and credit unions may still limit withdrawals, which can make it harder to access cash when you need it.Make sure to read the fine print on your account.

Experts usually recommend building up an emergency fund that covers at least three to six months of living expenses. To establish an emergency fund, consider saving over time—it may be easier to allocate a few hundred dollars to a savings account every month rather than saving a lump-sum all at once.

2. Create a Budget and Stick to It

Budgeting plays a key role in financial preparedness. By carefully tracking your income and expenses, you can view your financial situation and identify areas where you can cut costs. Utilize budgeting tools or spreadsheets to categorize expenses and set spending limits. Prioritize bills such as rent, utilities, groceries, and insurance. Regularly review and adjust your budget so it remains relevant.

Important

Inflation may impact cost categories differently. Price increases at the grocery store may be less than the cost increases you’d experience at your favorite restaurant.

3. Cut Unnecessary Expenses

Reducing discretionary spending frees up funds for essential needs. Analyze your monthly expenses and identify areas where you can cut back. Dining out, streaming services, subscriptions, and impulse purchases can add up quickly. Consider preparing meals at home and using coupons or cash-back programs for shopping.

4. Avoid Late Fees and Finance Charges

Late payments on bills and loans can lead to hefty fees, penalties, and damage to your credit score. Organizing your finances and setting up automatic payments helps ensure you pay your bills on time. Use phone reminders, budgeting apps, or calendar alerts to track due dates and avoid unnecessary charges. Set up auto-withdrawal payments where you can.

Contact creditors to arrange a solution if you cannot make a payment. This helps to indicate to creditors that you’re interested in paying off your debt.

Federal law allows individuals to obtain a free copy of their credit report annually from each of the three nationwide credit bureaus, Equifax, Experian, and TransUnion.

5. Take Stock of Your Non-Cash Assets

Beyond cash savings, non-cash assets can provide some relief. Conduct an inventory of gift cards, airline miles, loyalty rewards, and other assets that can offset expenses. Selling unused items—such as electronics, furniture, or collectibles—can generate quick cash.

Valuable items like jewelry or artwork may be sold or leveraged during a crisis. Therefore, you won’t have to pay additional expenses to maintain those assets.

6. Pay Down High-Interest Debt

Total U.S. household debt grew from around $8 trillion in 2004 to over $18 trillion in 2024. High-interest debt, especially credit card balances, can drain your finances quickly.

The debt avalanche method helps prioritize debts with the highest interest rates. With a debt avalanche method, you make minimum payments on all outstanding accounts and use extra money to pay the bill with the highest interest rate. If you struggle with payments, explore balance transfer options, negotiate lower interest rates, or consolidate debt through a personal loan.

7. Look for Ways to Earn Extra Cash

Explore opportunities such as freelancing, part-time work, or monetizing a hobby to boost income. Gig economy jobs like ride-sharing, delivery services, or online tutoring provide flexible income options. If your current job allows, consider negotiating for a raise, taking on overtime, or pursuing additional certifications (that your company may pay for) to increase your earnings.

8. Review and Optimize Insurance Coverage

Insurance serves as a financial safeguard against unexpected medical issues or loss. Review your health, auto, home, and life insurance policies to ensure adequate coverage and balance affordability with protection.

Increasing deductibles for all policies may reduce monthly premiums (though this means you’ll have to pay before coverage kicks in), while bundling policies can result in discounts. This also goes hand-in-hand with potentially disposing of unnecessary personal assets covered by umbrella policies. However, consider keeping coverage for potential risks such as disability or critical illness—for some, skimping on insurance could prove detrimental in the long run.

9. Keep Up With Routine Maintenance

Routine maintenance for your car and home prevents expensive repairs and prolongs the lifespan of essential assets. Regularly servicing an automobile prevents breakdowns, while maintaining your home may prevent structural issues. Additionally, try to maintain your health with annual or routine check-ups to detect medical issues early and avoid problems later down the line.

10. Plan for the Long Term

Financial crises may be temporary, but long-term planning provides lasting security. Invest in retirement accounts like a 401(k) or an individual Retirement Account (IRA), contribute to a diversified investment portfolio, and explore passive income opportunities.

Balance your emergency fund and retirement savings and maintain a consistent strategy. Although a financial setback may make it hard to contribute the recommended 15% in your 401(k), try to save at least enough to earn the employer match. For example, if an employer offers a full 3% match, you must contribute at least 3% before your employer contributes an additional 3%.

The Bottom Line

Preparing for a personal financial crisis requires discipline, planning, and proactive decision-making. Building an emergency fund, creating a budget, cutting unnecessary expenses, and securing additional income sources fortify your financial position. Paying debt, optimizing insurance, and making long-term savings and retirement strategies can also reduce unexpected financial burdens.