Emergencies and setbacks are going to happen on your path to getting out of debt.  Some may be minor such as an auto repair or appliance replacement while others might be major such as a job loss.  Both types can throw you off track if you don’t have a plan.

The popular advice is that you should have 6-12 months of cash to cover emergencies, but stashing cash in a low-yield account may not be a good strategy if you can apply it to high-cost debt.  With good planning, you can maximize the amount you currently dedicate to debt while still having the security of knowing how you can cope with emergencies.

Lay out a game plan now so you know what to do when these moments come.

Suggested actions

1. Understand your current spending levels and how you can deal with these under stress
   1. Use the Expense Profile form to outline your current monthly spending by major category.  Make sure to account for all spending-most of us tend to underestimate.
   2. Identify which expenses are mandatory such as rent or your mortgage payment vs. those that are discretionary such as cable, mobile phone, and entertainment.
   3. Identify which expenses you can cover on credit vs. those that must be paid in cash.  This will determine how much cash you must have access to.
2. Use the Cash and Credit form to identify sources of cash and available credit
   1. Sources of cash: Have a plan to access cash from 401k loan, family loan, savings account, existing HELOC so that you can meet pressing needs without a cash advance or payday loan.  Consider setting up a HELOC or talking to family to line up credit now before an emergency arises.If you feel truly at risk of bankruptcy, you should understand which assets are protected from bankruptcy.  Home equity and retirement assets are generally protected in bankruptcy and tapping into these assets if you are at risk of bankruptcy will reduce your net worth as you come out.  If this is the case, you should avoid tapping these assets.
   2. Sources of credit:  Know which credit cards have the lowest APR and have a plan to tap these in order of cost.
   3. Use the Expense Coverage worksheet to determine how many months of coverage you have for essential and discretionary expenses.
3. Create a plan for minor setbacks:
   1. How much cash and credit can you tap to meet minor emergencies?
   2. If this doesn’t provide a comfortable cushion, you may need to take aggressive action.  You may be able to meet this need by paying down credit card debt that you can tap later.
4. Create a plan for major disasters
   1. Create a plan for how you will pay essential expenses
      1. Cash expenses
      2. Credit expenses
   2. Create a plan for reducing your discretionary expenses.  Plan to act quickly-rather than creating a sense of panic, this will allow you to feel in control of your situation and buy you some breathing room.  Create a list of expenses that you can quickly eliminate:  cable, cell phone, gym memberships, magazine subscriptions, etc. are all good candidates.  You may have to pay cancellation fees, but these actions will save you money in the long term.
   3. Know in advance how you can recover from a job loss.  Create or update your resume so you will be well-positioned to immediately be able to apply for jobs.  Build a network.  Know job finding resources.
   4. Create a plan for dealing with your creditors.
      1. Know which creditors you need to pay (mortgage and auto) and plan to pay these first.  These lenders may not be the loudest when things are tough, but they are the most important.
      2. Create a plan for calling creditors to explain your situation and ask for breaks.  These could be a loan modification (lower rates or longer term) or partial payments for some period of time until your situation improves.
   5. Although these are drastic steps you should have a plan for cutting your mandatory expenses such as auto or home along with a timeframe that will allow you to take action before your situation becomes a crisis:
      1. Move in with family
      2. Sell or trade-down cars
      3. Rent out house and move to an apartment
      4. Rent out a room in your house

Emergencies can be a time of incredible stress, but if you understand your options before they happen and take quick action when they do happen, you can reduce the economic impact and mental stress.

Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.