There is no way around it, unexpected expenses happen, and they can be financially devastating if you are not adequately prepared. It is best to take steps now to put measures in place that will help you soften the financial blow if not prevent a financial fiasco entirely. Below are five different ways to prepare for the unexpected.
- Avoid High-Interest Debt
When an unexpected expense occurs, it is easy to use your credit card to pay for it immediately, without considering the ramifications of the interest payments. The problem with this choice is the interest rate, which is typically 15-20% on any outstanding balances. These interest charges can drag you into greater debt over a single event. One healthier financial option to cover significant, one-time expenses is taking out low-interest money loans. The interest on these loans can be small or non-existent, which makes timely repayment much more feasible.
- Cover Yourself with Insurance
One excellent way to prevent against large, unexpected bills is to cover yourself through the five main types of insurance: Auto, Health, Life, Disability and Homeowner’s/Renter’s insurance. Each one of these can take a chunk of your monthly paycheck, and when budgets are tight, people elect to take their chances that nothing terrible will happen. The downside to that choice is that one big event could rack up some serious debt. If you can only afford four of the five options, your situation may not necessitate life insurance. It can be an unnecessary expense for a single person while it is imperative for a single income family with young children.
- Create a Fallback Budget
A fallback budget differs from your regular budget because it only captures the bare necessities to keep life going: mortgage payments, gas, utilities, and food. You would use this budget if you lost your source of income and were forced to live on your savings. As a result, it should show drastic cuts from your normal spending patterns. It is best to have this in place before you need it, so there are no surprises.
- Build an Emergency Fund
An emergency fund is a separate account that typically contains enough for 3-6 months of expenses for a single person and up to 1 year for a single income family. How much money you need in an emergency fund depends on your financial situation. Building up this fund will take time so you will need to contribute to it regularly.
- Automate Your Savings
The best way to ensure you are consistent about saving is to set up automatic withdrawals that coincide with each paycheck. These withdrawals should route money immediately to your savings account or emergency fund account before you can use that money elsewhere. Now, to spend it, you will have to transfer it from your savings account, a step which could be enough to give you pause or hopefully, keep you from doing so entirely.
You can protect yourself and your family from the potential devastation of an unexpected expense by planning for the future. Take measures to reduce your exposure to high-interest debt by taking out low-interest loans for significant costs instead. Instead of taking the chance that no accidents will happen during the year, purchase the appropriate insurance. Create an emergency fund and automate your savings to ensure that it grows. And don’t forget to create a fallback budget based on absolute necessities that will maximize your limited funds under challenging times.