The best way to cope with unexpected expenses is to be prepared for them in advance! Financial planning is where you put controls in place that help you cope with both the expected and unexpected events in life. Here are my top four tips:
1. Put systems into place that prepare you for unexpected expenses. It could be a sum of money set aside as “savings” that you add to each month. Many advisors recommend having 3 months’ earnings set aside for just such a purpose.
2. Understand your risks and to take precautions to minimize them. If you aren’t aware of where your risks are, or haven’t evaluated them recently, sit down with a qualified financial advisor at a reputable firm. Consider all the potential areas of exposure: death, sickness, loss of income, loss of money, old age, unexpected accidents or repairs, and so on.
3. Where those risks could result in a devastating change to your life, secure your peace of mind with appropriate insurance. Many people have the basics covered, but what about critical illness, disability, business overhead or long-term care? There is pet “insurance” too, which can spread the inevitable costs of caring for you pet’s health over time, like a forced savings program.
4. Look at your sources of income. Do you have more than one? How much are you in control of its continuity? Many excellent business ideas have come about because the owner faced a critical expense, and faced it with an idea that brought in more money. But if you are proactive and think of that money-making idea before an expense takes you “over-budget”, you will be in better shape. Your secondary sources of income do not have to take a lot of time, either. Income-producing investments, rental properties, or an idea that can be licensed or that produces royalties all count as alternative sources of income.
November 10th, 2008 at 10:02 pm
Tracy,
Thanks for a great topic. One of the strategies that we teach our clients goes along with having systems in place as you pointed out in tip #1. We coach all of our clients to have lines of credit in place that can be used in the case of unexpected expenses/emergencies. The worst time to go looking for money is when you need it. If that decision has already been made, and that “system” is already in place, you can pay the expense/s without making decisions based on necessity or emotion. You simply pay the expense using the line of credit and then focus on paying that debt down. This makes it possible to maintain a reasonable credit score and benefit from unused resources, like that good credit score.
Of course, having a liquid asset like cash available may be the best and most lucrative way to address an unexpected expense. For many of our clients however, here’s the challenge with accumulating 3-6 months of living expenses in cash. If you think about it, assuming that a client is capable of saving 10% of net income per month, 3 months of net income saved would take apx. 30 months to accumulate; 6 Months would obviously take around 60 months. That is, of course, providing there weren’t any set-backs along the way. I’m not saying that having the cash on hand wouldn’t be ideal, but unless the client has no other debt, including mortgage debt, we find that in almost every situation it makes more fiscal sense to use discretionary monies to leverage debt pay down and use lines of credit to fund emergencies and unexpected expenses. After all, paying interest at 4%-24% while earning interest at .25%-4% in most cases isn’t the best use of resources.
I should note, there is a level of discipline involved with this strategy, so it is not for everybody. If you constantly overspend, lines of credit may not be the best choice for you. Once again, it’s about having the proper systems in place and then using those systems appropriately. This is one of the reasons that we promote the Money Merge Account® software from United First Financial® so arduously. It will manage this process for each client, based on their individual circumstances. When unexpected expenses arise, the client puts the information into the system and it recalculates how they should allocate their resources, maximizing the potential of those resources.
Again, great topic.
Cheers,
Travis Mitchell
Certified MoneyMinding Advisor
Founder/Director of Debt Free Project International
http://www.DebtFreeProject.com
1.888.332.8334 ext. 719
PS.. Working with a good financial planner will also ensure that the proper insurances and protections are in place in the case of catastrophic expenses.
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