Keeping Finances on Track During Unexpected Events

Whether you're just starting to save or are a seasoned investor, a financial plan can play a crucial role by helping you manage your financial priorities and goals—both big and small.

But financial planning doesn't just help you set goals—it equips you to adapt when life changes. That was my takeaway from our recent Schwab Modern Wealth Survey. Those who plan feel more confident, are better prepared for uncertainty and feel more financially stable.

When life takes an unexpected turn, your next steps matter. It's important to take timely action. Here are five ways you can stay focused and minimize financial disruption when life doesn't go according to plan.

An emergency fund with at least 3 to 6 months of living expenses is crucial to a financial plan and can provide a cushion in the event of a serious illness, unplanned home or car repair, injury, or other unexpected challenges. An emergency fund acts as a financial safety net, allowing you to manage unforeseen expenses without having to dip into your long-term savings or resorting to high-interest credit card debt.

Ideally, your emergency fund should be in something safe and liquid like an interest-bearing checking account, money market account, or short-term CD.

In situations like a natural disaster, we also recommend having a couple of hundred dollars in smaller bills at the ready for things like food, gas, prescriptions, etc.

Having an estate plan is another important way to protect both your finances and your family. Essential estate planning documents like a durable power of attorney, advance healthcare directive, health care power of attorney, a will and/or trust can provide you and your beneficiaries with control over your assets. Without these documents in place, you and your beneficiaries will likely be distracted with greater legal obstacles, delays, and headaches rather than taking care of what's most important and timely.

Outside of estate planning documents, it's important to maintain up-to-date records of financial accounts, financial contacts, logins, and passwords in a safe, accessible location (physically or in the cloud).

Having adequate insurance coverage safeguards you and your family from unforeseen events that could significantly impact your financial plan. Proper insurance coverage in key areas like health, life, disability, long-term care, home, and auto can help provide you and your family with protection should unexpected situations occur. It's a good idea to assess your current need for insurance in these five categories:

• Health insurance: Having appropriate health insurance coverage is an essential part of a financial plan. Some people select the least expensive monthly premium to help save on costs, however this often means a greater out-of-pocket expense when you need to use it. There's no free lunch.

  Review your insurance choices with the potential out-of-pocket limits in mind. If you feel the least expensive monthly premiums is the right fit for you, make sure you have enough savings in an emergency fund to potentially cover your deductible and co-insurance amounts.
   

• Life insurance: Should you pass away unexpectedly, life insurance can provide meaningful emotional and financial benefits for your dependents. As your base, look for the most cost-effective way to help replace income. You may have access to group life insurance through your employer, but if you're healthy, you may be able to find less expensive insurance on your own for potentially greater coverage. 
   
• Disability insurance: The probability of experiencing a disability is far greater than that of dying, but most people tend to gloss over this risk. Disability insurance can help replace lost earnings should you experience an unexpected disability—temporary or permanent—while you're working. Disability insurance can be short- or long-term and may only cover part of your income. Review your policy to understand how much coverage you have or consult with your human resources department or a qualified insurance professional. 
   
• Long-term care insurance: Long-term care insurance is geared towards retired individuals who need the services and support related to day-to-day activities like walking, feeding themselves, bathing, toileting, etc. Medicare doesn't pay for this care, contrary to what most people believe. While not everyone will need this help or incur expenses related to it, this insurance is an option to help mitigate for a risk that can significantly impact a retirement savings account or cause a significant financial burden on your family. 
   
• Home and auto insurance: Having adequate property and casualty insurance helps to reduce the financial hardship you might have from damage to your physical property and/or from a liability from an accident. Home and auto insurance premiums as well as what is covered in a policy have been changing in the last few years, especially in areas prone to natural disasters. It's best practice to work with your insurance agent or broker to help navigate your choices and find the right coverage based on your specific needs and budget.

Stress testing your financial plan involves simulating different scenarios—like a loss in income, early retirement, high inflation, major market event, or high medical costs—to test how well your plan holds up under financial stress. You can think of it as a "what if" approach to your financial future. If you're thrown curveballs, will your portfolio be resilient enough to endure them?

Conducting a stress test with your financial plan allows you to evaluate your preparedness and identify potential weaknesses in your plan—and make any necessary adjustments as needed.

Financial plans aren't a one-and-done document—they require ongoing review (at least once a year) to ensure they're still accurate and reflect your current circumstances. Major life events like buying a home, losing a spouse, or taking an early retirement can shift your financial priorities and goals, so it's important to update your plan as life changes occur.

Unexpected life events are inevitable, so consider viewing your journey as less about sidestepping every challenge, and instead, focus more on building the resilience you need to navigate the changes when they arise. Take these proactive steps to lessen their impact and help protect your financial well-being.