Preparing for the unexpected, financially, is something all responsible adults need to do. Learn how to stay off of your mother's couch and weather through your next financial emergency.
Did you know that a good chunk of Americans (the exact percentage is not clear, but it's sizable) would need to borrow money from family, take out a pay day loan, charge their credit card, or sell something to raise the funds for an unexpected $400 financial emergency?
That's frightening, to say the least.
This is based on the Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2017 (kind of sounds like it should be the “Report on the Economic Downfall of U.S. Households”, eh?)
Here's the thing: unexpected things happen all the time. And yes, they happen at the cost of $400 and above (though, thankfully, many things happen that cost less than that as well).
But what most people don't understand is, you can actually prepare for these events. Preparing for the unexpected, financially, can at least put you in a much better position than you would have been otherwise (which should help you sleep a bit better at night).
Not to mention, keep you from feeling a ton of financial stress.
Before I show you how to go about preparing for the unexpected, let's look at some examples of what unexpected events can look like.
Examples of Unexpected Events and Unexpected Financial Emergencies
You could be going along in life, doing just fine (or, perhaps not great, but at least paying your bills), when suddenly something happens that was completely unexpected.
Here's the thing: it doesn't have to be what many of us would consider a huge emergency. It could just be a smaller “nuisance” that throws off your finances for a week, until next payday, a month, or much more.
And then you have trouble finding your way back.
Examples of the Unexpected include (I'll put an asterisk next to the ones that have actually happened to us!):
- Your second car breaks down one month after buying your first house*
- You thought the refrigerator was included with the house you just bought, but find out at closing that it's not*
- You chip your tooth while trying to move furniture into your car, and you need to meet your dentist deductible for the year*
- You birth goes not-as-planned (like, not in the least), and you end up in the hospital for a total of 10 days, after your baby is in the NICU for 3 days*
- Because of 10 days in the hospital, your body is incapable of breastfeeding, which was what you really, really, wanted to do (and you tried everything, including working with a lactation consultant for a week)…so you have to buy formula now*
- You travel to Michigan to visit relatives, and while you're away, a hurricane develops that ends up flooding the car you parked at the airport*
*Ummm…actually ALL of these unexpected events have happened to me + my husband. And to be honest? It's just a handful of what we've faced in the last decade together.
Now you can see why I'm talking about this subject — it's vitally important, AND, I have a lot of experience with it.
How to Prepare for Unexpected Expenses in Life
Ready for some sound money advice?
Many financial problems can actually be resolved before they enter your life by better financial planning.
Let me show you what I mean.
Up until a few years ago, I felt that anything negatively affecting our accounts (besides groceries, gas, and the usual) was a big ‘ol nasty surprise.
…a year and a half ago when the tile started coming up off the floor of our master shower, revealing that there was no shower pan and someone had tiled right onto the foundation (we’re finally getting around to this job)
…or the day when I was hit with freezing cold water because the water heater had unexpectedly stopped working 3 months into Paul’s unemployment
…and this past weekend when one of our car batteries died while we were picking up some coffee
However, a conversation I had with a coworker several years ago showed me that I was completely wrong.
Is it really a Surprise that a 10-year Old Beater Car Died?
Several years ago I was fuming at my coworker friends because my beater car had died. It turned out to be the transmission or the head gasket, or some other hugely important (and highly expensive) piece of equipment to repair. But the cost of the repair did not make sense with what we had paid for the car.
Nasty financial surprise: getting to pay for a new beater car!
Then one of my friends turned to me and said something like, “Come on, Amanda. You knew that car wouldn’t last forever.”
He then went on to explain to me how you’re supposed to open a car savings fund as soon as you purchase a new car and make a payment to yourself each month so that by the time your car dies, you have enough to pay cash for a new one.
Well, not at first. First I had a few more “poor-me” thoughts (who doesn’t need to calibrate their money mindset from time-to-time?).
But then it turned into this great epiphany that changed the way we do finances in our household forever.
Planning for Predictable, Nasty Financial “Surprises”
If I want to keep my head in the sand, then I would continue to welcome these “surprises” into our lives. But if, instead, I decided to do a little planning for the normal life cycle of things, then I could prepare us with some proper funds in the bank.
Control? I love control!
Liz Weston talks about this in her book, The 10 Commandments of Money: Survive and Thrive in the New Economy.
She explains that the three biggest unexpected expenses that “surprise” people the most, according to a Pew Research Center Poll, are:
- Medical (34%)
- Cars (24%)
- Housing (20%)
The thing is: you should not be surprised when there are costs associated to these three categories.
They’re more like corrections and upkeep, not surprises.
Sure, it might be surprising when and where it happens, but it should not be surprising that you will have to do things like make home repairs, go to the doctor and take care of conditions that occur naturally, and repair/replace vehicles.
How to Know What to Save for the Big Three
So, how should you estimate what to save in order to put yourself in the best possible position moving forward (without feeling like you’re pulling a number out of thin air)?
- Medical: Take a look at your current health insurance policy. What are your deductibles for smaller medical expenses, such as doctor visits and prescriptions, and what is your maximum out-of-pocket you will be responsible for if you or anyone in your family ends up in the hospital? You’ll want to set aside money in accordance with these figures.
- Cars: For cars that are up to 5 years old, check out Edmunds.com True Cost to Own Calculator. If your car is older (beaters are the way to go!), then Liz Weston suggests adding up your repair receipts from recent years, add in 10% for good measure, and figure out a yearly average to save.
- Housing: The advice given here is that you will generally spend between 1-3% of the cost of your home each year in repairs and maintenance. So take the amount you paid for your home, and multiply it by 0.01 and 0.03. Aim to save a number in between these two each year for house repairs. (Hint: if your home is older, save closer to the 3%, and if it is newer, save closer to the 1%).
Keep a Buffer in Your Checking Account
It takes several days to move money from your savings account to a checking account (normally), and you may or may not have access to a credit card in an emergency (you certainly, by definition, don't have time to apply for one).
Because of this, it's always a great idea to keep a buffer of cash in your checking account that you can easily access with an ATM or by going to a bank (or writing a check/debit).
I hate nasty financial surprises whacking me over the head as much as the next person. And you generally can’t predict the exact date of when something is going to occur. But with a little smarts and planning, you can get pretty close, which will allow you to prepare yourself.
After all, an ounce of prevention is worth a pound of cure!
How to Plan for the Unexpected – Take a Walkabout
I am not talking about going into the wilds of Australia for six months until you come out a man. I am talking about literally walking about your home, apartment, car, and life in order to examine the things that allow your life to run smoothly and at the level of affluence you have become accustomed to.
Two weeks ago on the Suze Orman show, Suze offered up what I thought to be great advice. It was a segment called “Get Real”, and she basically said that even if you are doing well financially—you have emergency savings, your cars are paid off, your IRAs are funded—before you think about splurging on a large purchase, do a walkabout in your life and figure out what could go wrong next.
I took this advice and walked around our own home in the middle of the show. I must admit, after doing this for awhile, all of our appliances and belongings started looking less like fixtures, and more like liabilities. My eyes first rested on our washer and dryer, which were a nice leftover from the previous owners. Granted, the washer and dryer have been working great for the last three months, but they show some serious signs of aging (not least of which is the rust cutting through the paint like metal shards). We don’t know how old these appliances are, but we do know that our current budget has factored in that these appliances will last forever.
Other Areas that Will Need Money in the Future
- We have a newly bought used vehicle with 113,000 miles on it, so should definitely start saving specifically for when this vehicle dies, or for car repairs in the next few years.
- Our water heater is over 8 years old. Average life of a water heater? 8-10 years.
- Our mattress was gently used when I traded my desktop computer with my sister for it back in 2005 after graduating college. Granted it is still extremely comfortable, but average life span of a mattress is around 10 years. That is only 4-5 years away!
- Laptops only last a few years (my last one was great for 5 years, which I have heard is considered ancient to many people), so we can expect to have to replace ours in the next 2-3 years.
Why do I want two of these types of accounts?
Well, I view our emergency fund account as covering our day-to-day basics and necessities should either of us lose our job, get hurt, etc. This new account would specifically cover large, “unpredictable” expenses that are sure to creep up, such as home maintenance, car repairs and the like.
Another great idea is our home warranty, which has been particularly helpful thus far as our ancient heaters stopped working several weekends ago when the temperature dropped into the 30s, and our dishwasher just died on us Thursday night. Our real estate agent had the great foresight to write into our contract that the previous owners would pay for a serviceplus package at American Home Shield (AHS) home warranty company for the first year in our home. This covers not only the basic things, like water heaters, furnaces, A/C units, etc., but also items that were installed incorrectly, out of code units, and dishwashers (hurrah!). We have all ready called our service twice, and paid $60 each time to have work done on our home. What a relief it was! Granted, there are varying reviews about home warranties, and I think that would make a great article, but thus far we have been satisfied with ours.
Go ahead and do a Walkabout in your own home. How are things measuring up? What could go wrong next?