I took my car into the shop this week for what I thought was a minor problem and walked away with more than $1,200 in repairs. Luckily, I had emergency money to cover them, but the experience got me thinking: do other people have plans in place for when unexpected expenses arise?

If you don’t, here are some tips to help you develop one.

Step One: Imagine the Worst Case Scenario

I don’t mean that in a sinister, masochistic way – imagining the worst that could go wrong in the various areas of your life will allow you to prepare for such occurrences. It also helps to think of worst-case scenarios when you don’t actually have to deal with them, because you can reason more clearly.

Here’s the list I came up with, and initial steps to take if they happen:

• Major car repairs: Consult at least two mechanics. Consider ordering parts myself. Run everything by my dad (or an auto expert you know and trust).
• Job loss: Network (start doing this now). Sign up with career websites. Keep résumé up to date. Maintain positive relationship with boss (for recommendation letters).
• Serious illness or injury: Maintain medical insurance. Understand employer’s policies for paid and unpaid leave.
• House damage (from a storm, flood, fire, etc.): Update and understand insurance policies. Make sure I’m covered for disasters likely in my area.
• Car accident: Wear seatbelt. Maintain car’s safety with regular checkups. Review insurance policy.
• Serious theft: Install alarm system. Keep all credit card and bank numbers on file (along with phone numbers for issuers) to cancel them if necessary.
• Family member’s request for financial help: Be prepared to say no.

The Elephant (Not) on the List: Money

Naturally, every one of these emergencies would require at least a little financial investment. So that’s step two of the Emergency Plan: save money. If you aren’t much of a saver, read this page on why saving money important it is.

And, once you’ve been converted, take some time to estimate the costs each of your worst case scenarios. If you have a choice about how much you spend (could you live without a car? How much can you afford to give to a relative?), set a limit while you’re levelheaded. That way, if you’re ever forced to make a tough decision, you’ll have some numbers to look back on.

You may even want to open a separate savings account for emergencies, so that you’re never tempted by that money.

Additional Resources

Emergency Funds: Getting Started (PDF)

Savings Fitness (Personal Financial Planning Guide) (PDF)

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