Let’s shift gears for a bit, as fast as your life might lurch when you are faced with an unexpected large expense. Maybe your car died, or your home needs a sudden major repair, or you’ve been informed of a fee or a fine you didn’t even know was a thing. Maybe you budgeted for class tuition and didn’t realize there was a big pile of expensive books and materials you’d need to buy, or that home improvement project was more expensive than you thought it would be, or you were offered a once-in-a-lifetime opportunity to go on a dream trip. It’s one thing when we have steady drains on our income, but these big surprise bills are a little different in how they affect us and how we can deal with them. Financial emergencies can be just as scary as physical attacks for some of us, and they’re often far more likely. Fortunately, you can prepare for both so that you can live in less fear of either. I’ve listed a number of ideas below, but you can pick just one to get started with:
If you aren’t currently in a position where you are trying to figure out what to do with a sudden expense, spend some time considering what might come up. Sometimes we are truly blindsided by hits like these, but other times, if we’re honest with ourselves, we knew that it was coming, just maybe not when and how much. It’s uncomfortable to think about big dollar figures we might be on the hook for at some point in the future, but it’s a lot more painful if we let ourselves be surprised by them. Instead, we should keep track of the age and state of wear of the big ticket items in our lives, and look ahead to upcoming life events that might be expensive. As they get closer to reality, we can start researching options and costs so that we have an idea of what we might need to have available, and protect ourselves from opportunists who might take advantage of panicked emergency shopping. As part of that, we might build a cushion into what we know is coming, like planning to need to fix some weird surprise found when you’re installing that new dishwasher or dryer you’ve been saving up for.
Even if you’re not expecting a big potential expense, save up an emergency fund. The amount of your emergency fund is up to you and while there are rules of thumb like three to six months of living expenses, there are other ways to calculate how much should go into it. Your income might be limited so that you can only put a few dollars in at a time, or can only afford to tie up a few hundred or thousand at any given moment. You might have done the exercise in the previous paragraph and realized that you need an extra amount for what might become an emergency, like a possible spike in a utility bill if there’s a very cold winter or hot summer or rumors of layoffs at your job. Regardless of how you figure out the size of your emergency fund, also set the conditions under which you’ll use it. You don’t want the fund to be depleted for things that turn out not to be emergencies, or to have it sitting untouched when you really should have used it.
In addition to your emergency fund, start working on your credit now. Building or repairing your credit score can be a long and frustrating process, and one that feels intensely artificial. However, working through that process of getting, using, and paying off credit cards or small loans is important for two reasons. One is that as you do so, you may be able to build up enough credit to manage unexpected expenses up front and deal with figuring out how to deal with payment after, like having a credit card or line of credit ready to go, or the ability to have a short-term loan approved without hassle. The terms might not be great, but they can help kick the can of the financial problem down the road a little. The other is that you will have some education and experience with paying off lower consequence and often lower cost items. You can learn principles like only charging amounts you have high confidence you can repay, and using a credit card for time and other benefits, without doing it, but baby steps in practice can be part of building the knowledge and discipline to make loan terms work in your favor.
If you need to borrow money to meet the expense, pay attention to the terms. What and how often is the required minimum payment? Having a sense of your current monthly budget and spend will help you make fast decisions about whether you are able to make those payments. How many payments do you need to make over what period of time (in other words, what is the length or term of the loan)? The number will tell you how long you are on the hook. High payments for a few months are likely more palatable and doable than high payments for years on end. Related to that, what is the interest rate? A high interest rate and a long term might mean you’re paying as much in interest as you are actually borrowing. You might not have a choice, but it’s better to know, especially if you know that you can lower effective interest rates by paying extra, but only if there are no prepayment penalties and if your extra payments are applied to principal. And what are the penalties if you don’t manage to make your payments on time? You might be responsible for late fees, or the lender could call your entire loan due so that you now have to pay the whole thing at once. What those penalties are should figure into your calculation of whether the loan is worthwhile and how you need to prioritize paying it back.
Loan terms, or the time you might need to replenish your savings, should also play into your thinking about whether you really need to spend that cash now. As with many other shocking and urgent events, you might feel pressured to act immediately even though it’s not absolutely necessary. You might be able to get by and do without the thing either entirely or for some time until you are able to find a better deal or save enough money to make the expense less of a burden. It’s not always better to go with a cheap stand-in option while you figure it out, but it might be the best route available to you. A repair might be enough to limp your car along for another six months or year so that even though you know it’s a dead car rolling, you don’t have to figure out how to buy a new one right away. Borrowing money to pay for the emergency might be worth it if the interest and penalties are low and you know you can afford to make the payments, but maybe you can reconsider if you need the thing at all if otherwise. There are no right answers here, except to think about the alternatives to paying for that expense.
If you do need to pony up the money after all, be creative with other avenues to meet those expenses. Your resources include friends, family, and family of choice, not to mention your wider social network. They might know what is normal for that expense, so you don’t overspend because you didn’t know better. They might be able to find or cut you a deal or lend you money on friendly terms, if only you ask them to help you out or even point you in the right direction. They might know the right shop or service provider to go to so that you’re getting the best value and quality for your money even if it’s the same amount no matter where you go. You also have the power, in many cases, to negotiate the amount of the expense or the terms under which you’ll pay for it. You can often do price and feature comparisons or horse trading, or ask for second opinions and quotes instead of blindly buying whatever someone tells you the emergency requires. Sometimes, you can find other ways to meet the need. Maybe you can buy used instead of new, or go with an alternative solution like sharing a textbook with a friend.