Financial emergency? Ditch your credit card for this plan.

Credit cards can be useful, but they aren’t the best tool for financial emergencies. They kick the problem down the road. They may help overcome short-term challenges but leave a family struggling to regain long-term stability.

Instead of relying on a credit card for your next emergency, check out how my wife and I built our three-part emergency plan:

• Part 1: Build an emergency fund - An emergency fund is like the spare tire that comes with a car. If we lose our primary income or face a significant, unexpected expense, we depend on this emergency money to support our family as we navigate back to financial stability.
• Part 2: Plan for short-term continuity - An emergency might involve losing some or all of our income, so we devised a plan to ensure we can immediately take action to keep our necessities available. We answered hard questions now, leaving little room for disagreement or argument when anxiety is high and time is limited.
• Part 3: Outline recovery options - We discussed essential decisions and concessions that may be necessary after an emergency. Recovery may be as simple as replenishing an emergency fund or as complicated as downsizing your home and changing your lifestyle.

Part 1: Build an Emergency Fund

An emergency fund is the best tool for maintaining short-term continuity after receiving an unexpected expense or losing income altogether. When we receive an unexpected expense, we can use our emergency fund to pay instead of increasing the cost with a high-interest loan. If we lose some or all of our income, our emergency fund will help us maintain access to our necessities.

We started by calculating the monthly cost of our necessities. Our necessities include (but are not limited to) shelter, food and water, planned medical expenses, insurance premiums, car and home maintenance, gas or fees for necessary transportation, essential childcare, essential pet care, and minimum debt payments for any outstanding debt.

Next, we set a funding goal. Given our skill sets and responsibilities, we considered how long it might take to recover from a financial emergency. Experts recommend covering three to six months of necessities (calculated above). Since we have a child dependent on us, we decided to be more cautious and chose six months.

• Find more guidance at Emergency Fund: What it Is and Why it Matters - NerdWallet

Finally, we added a line to our budget to contribute to the emergency fund until we met our funding goal. Everybody will have a different speed for saving, but we treated this as a high priority. Once we met our goal, we removed it from the budget.

Tip: Consider paying off debts more aggressively while earning a full income to remove the burden of minimum payments on your emergency fund.

Part 2: Plan for Short-Term Continuity

Our short-term continuity plan is our “current selves,” telling our “future selves” not to panic. We wrote down this plan so we do not need to make these decisions under duress.

For unexpected expenses, we plan to use our emergency fund to cover the cost if — and only if — we cannot make concessions in our current budget. Once the expense is paid, we will replenish our emergency fund in future budgets until we reach our funding goal.

For more complicated emergencies involving loss of income,

We listed all the expenses we expect to pause while living on a reduced income. We made this decision now so disagreements do not turn into arguments in the heat of an emergency. The emergency fund will not be used for any expenses included in our list.

Tip: When an emergency arises, pause your unnecessary expenses immediately to avoid overspending your emergency fund. Trust your past self!

We also discussed temporary jobs we are willing to take to partially recover our income while looking for a more permanent solution. Here are the questions we explored:

1. Is the homemaker able and willing to take on work while the primary income earner finds a new job?
2. Do we have family or friends who can watch our children while the homemaker works, or will we need daycare?
3. Is the primary income earner willing to take on a temporary job to bridge the income gap while they seek a more permanent, desirable position?
4. How long should the primary income earner search for a permanent position before taking a temporary job?

Tip: Keep resumes up to date and ready for action.

Finally, we discussed our short-term plans for permanent events like injury or death. We made sure to have a backup plan — aka our emergency fund — to cover medical or funeral costs during the insurance claims process if necessary. You don’t want to be left at the mercy of an insurance company during emotionally difficult times.

Part 3: Outline recovery options

Recovery is an open-ended question dependent on the cause of lost income. Hopefully, recovery will be as simple as replenishing an emergency fund or finding a comparable job. Sometimes, recovery may be a little more complicated. We can imagine circumstances where we need to downsize our home or move closer to family for support.

Like our continuity planning, we discussed the hard questions now, so we are not making the situation worse with arguments and panicked decisions. We outlined tough — but realistic — scenarios and discussed how we might react. “Outline” is a keyword here. We did not want to overthink and doom scroll. Our goal was to get on the same page. We did not plan out every little detail and don’t recommend it.

Tip: Sometimes, an emergency may leave one parent making decisions alone. It’s essential to take action ahead of time so the surviving parent is not left financially or logistically struggling while facing emotional distress.

Here are the questions we explored:

1. Is the primary income earner willing to reskill into a new profession if their current profession is no longer an option? How would we fund the reskilling while income is reduced?
2. Is the homemaker willing to take a more permanent working position? How can we cover the cost of daycare?
3. Are we willing to move to a new location for a new job? We found a pros vs. cons list helpful for this question.
4. Are we willing to downsize our current house or apartment to minimize our cost of living?
5. What other lifestyle concessions are we willing to make for radical emergencies?
6. If the surviving spouse is given a large insurance payout, how would they spend it responsibly?

Conclusion

While we don’t welcome emergencies into our lives, we maintain a plan to help ease our anxiety when times are uncertain. We do not want to fall back on a credit card for emergencies because they kick the problem down the road. Instead, we set money aside to fall back on, and we make important and thoughtful arrangements and decisions ahead of time so we do not panic or argue when times are tough.

Tip: Remember, don’t overthink things! You have a lot going on. Just having these discussions with your partner, spouse, or co-parent strengthens you and your family. Start by exploring the questions we shared and add your own as the conversation expands. From there, you can best decide if and how you want to fortify your emergency plan before the next emergency strikes.