Get All Access for $5/mo

How to Minimize Risk and Protect Your Money During Times of Crisis What you do with your money now will help you be financially prepared for future emergencies.

By Beau Peters Edited by Dan Bova

Opinions expressed by Entrepreneur contributors are their own.

Sezeryadigar | Getty Images

The government has stepped in with a stimulus package to help businesses weather the storm, but the pandemic has illustrated the importance of financial preparation for households and businesses of all sizes. Consider the following ideas on how you can prepare to minimize your financial risk during an emergency or crisis in the future.

Reduce and eliminate debt

Debt in the form of credit cards, personal and business loans, and medical debt can represent a significant amount of your monthly budget. The debt you carry incurs interest which eats up a portion of your monthly debt repayment allocation. A percentage of each monthly payment you make goes toward interest, essentially slowing down your goal of paying off the debt in full.

Reducing and eliminating debt can free up a portion of your business or household budget so the funds can be redirected into more important goals such as growing a savings account or investing.

Related: 5 Ways to Leverage Market Downturns as Opportunities to Make More Money

Review your business and personal recurring debts to identify which ones are costing you the most. When you identify the highest-interest ones, pay them off first. A couple of ways you may be able to pay off the debt faster include the following:

Consolidate your debt

A debt consolidation loan is meant to combine your existing debts into a single payment. The loan should come with better terms than your existing debt and with a lower interest rate. Consolidating all higher-interest debt into a single, lower-interest loan simplifies your repayment schedule and saves you money on interest so you can chisel away at the principal portion of your debt faster.

Find passive income or start a side hustle

Boosting your current income to allocate the money towards repaying your debt may be one of the fastest ways to pay down your responsibilities. Consider starting a side business you can run on weekends or evenings to supplement your earnings, or branch out your existing business. Brainstorm business and side hustle ideas, do your market research to find what people need right now, put together a business plan, and get started.

Have a savings fund

When it comes to financial advice, most agree that an emergency savings fund that covers unforeseen expenses is a good idea. The pandemic is the perfect example of why the concept works. Individuals and entrepreneurs that have savings contingency plans are likely to fare better in a crisis.

The thought behind the concept is simple. Businesses and households that can cover at least three to six months of expenses can continue to operate and pay their bills for the short term. They're better positioned to navigate a downturn or unexpected event and come out unscathed.

Related: 4 Fun Ways for Millennials to Dip Their Toes Into Investing

Others who didn't save are all too aware of the impact of a sudden change to their finances such as a job loss, medical illness, or nationwide shutdown. Their income may have changed or stopped, but the bills are still due. Many turn to loans and credit cards to fill the gap, leaving them with heavy debt that could take years to pay off.

All businesses and individuals should actively add money to their savings or investment accounts. Aim for an amount that would provide a cushion of at least six months for business operating expenses or for your personal budget. Save aggressively until you reach your goal, and then set up an automatic savings plan to get yourself in the habit of consistently putting away money for the future.

Diversify your investments

Keeping six month's worth of savings in a money market or high-yield savings account may be acceptable but not ideal. The interest earned is minimal, but you have access to the cash quickly in an emergency. Larger amounts of money should be allocated towards an investment portfolio. The crux: the market can be volatile, especially during a crisis. With the uncertainty in the air, investors get nervous.

Related: 5 Personal-Finance Mistakes That Kill Promising Companies

To mitigate some of the volatility, review your investment portfolio regularly to ensure you have a good ratio of stocks and bonds. Diversification is essential. Consider adding asset allocation funds, which take the guesswork out of diversifying your investments. Depending on your comfort level with risk, you can choose a 70/30 allocation fund, which maintains 70% of your investment in stocks and 30% in bonds. Also consider adding an index fund to your mutual fund holdings.

Be prepared

Remember the Boy Scout motto: "Be prepared." If the pandemic has taught the world anything, it's that it's nearly impossible to predict how a crisis or emergency will affect you. Entrepreneurs are already comfortable with some level of risk. You can't completely eliminate risk, but you can be financially prepared to overcome it.

Beau Peters

Freelance Writer

Beau Peters is professional with a lifetime of experience in service and care. As a manager, he has learned a slew of tricks in the business world and enjoys sharing them with others who carry the same passion and dedication that he brings to his work. .

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Business News

How to Be a Billionaire By 25, According to a College Dropout Turned CEO Worth $1.6 Billion

Austin Russell became the world's youngest self-made billionaire in 2020 at age 25.

Living

Taylor Swift Has a Lucky Number. And She's Not the Only High Performer Who Leans Into Superstitions to Boost Confidence.

Even megastars like Swift need a little extra something to get them in the right mindset when it is game time.

Marketing

SEO Trends You Need to Be Aware of Right Now, According to a Seasoned Pro

Navigate the future of search engine optimization to elevate your online presence and drive meaningful engagement.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.