Despite all your planning and preparing, something will go wrong. Your dishwasher may break. Your car may need repairs. A health emergency may arise. Life happens, and sooner or later you’ll be faced with an unexpected expense. That’s why it’s so important to build in a contingency plan.
A prudent person foresees danger and takes precautions. The simpleton goes blindly on and suffers the consequences. — Proverbs 27:12
When you’re slammed with a surprise bill, what should you do? In a perfect world, you would use money saved in an emergency reserve savings account. To get started, most financial professionals recommend saving $1,000 or more in the event of an emergency. Ultimately, it is recommended to save about 3-6 months of expenses to be in a good position. But, when you’re focusing on paying down debt, sometimes it’s hard to prioritize other financial goals like saving.
Consider these tips in the event of the unexpected:
- Plan if you can. You may be able to predict the future with a quick look back in time. Review last year’s expenses and flag any transactions that were out of the norm. Build those expenses into your current spending plan.
- Think before you react. Is the new cost a need? Can it wait until the next payday? Can you put something else off until the next payday to afford the unexpected?
- Don’t neglect your credit. Even with your emergency fund (if you have one), you still may need more cash. It’s moments like these where you’ll thank yourself for preserving your credit. If you need to borrow, good credit will help you score a better interest rate.
- Put tools in your toolbox. When you’re facing an unexpected cost, reach into your financial toolbox and pull out the tool that’ll solve the problem. For many, that tool is a home equity line of credit. A home equity line of credit is continually reusable and has an interest-only minimum payment. It’s a great solution for a short-term financial need, if you have a plan in place to manage payments. Remember: Don’t take out more debt if you’re already struggling with debt.
- Reflect on your goals. When we begin to make meaningful change to our finances, we usually start too aggressively. We decide we are going to save 50% of our income each month, never go out to eat again and cut up all our credit cards. While this ambition is admirable, you may not be able to keep up the pace. Make sure your goals are realistic and leave room for important pillars like emergency savings. After all, what good does it do to make a bunch of financial changes that only last a few weeks?
- Take inventory. One way to avoid unplanned expenses is to be stay one step ahead of those costs. Take inventory of the large, costly items you own (like your furnace, water heater, car, washing machine, etc.). When do you suspect those items will need repair or maintenance? Turn those unexpected events into planned-for expenses.