Have an emergency? Find the money from both expected and unexpected places!
The other day, I had an emergency: my computer hit the dust a second time in 2 years. The first time it croaked, my hard drive crashed but most of it was recoverable. I ended up spending close to $1,500 to get my data back. This time, my computer finally gave in, refusing to power up.
I wasn’t ready for the disruption I’d face if I made the shift to a new machine, so I procrastinated on making the replacement. I also hesitated on this purchase because of the cost (I had a backup machine anyway), given how much my household spends on a regular basis (yes, we try to pull back somewhere!). But eventually, I acquiesced — this, after all, is a necessary business expense. Still, it’s money I wish I didn’t have to part with just yet. I reminded myself that this was an emergency and it was time to dip into those savings once again.
This brings to mind some strategies to keep in mind for times like these. Financial emergencies can be frustrating so knowing that I’ve got options always puts me in a better mood.
Ways To Deal With An Unexpected Expense
#1 Find out what expenses you’re actually responsible for.
I was quite surprised how a lot of people automatically assume that whenever something “breaks” then they need to replace such items on their own dime. That’s not always the case. For instance, if you’re a tenant, don’t immediately assume that you’re responsible for things that require attention in the home you’re renting. Find out what your rights are and what your landlord is required to cover before you rush to get something fixed in your residence.
Remember as well, that the best time to address an emergency is before it happens. If your situation calls for an insurance or warranty claim, then you may not be in the hook to cover that impending bill. If something of yours breaks, see if it’s covered by a service contract, warranty or an insurance clause. In some cases, your credit card may even be useful in this regard — some cards have free and generous benefits that allow certain types and amounts of coverage. So before you panic, find out if your unexpected expense truly falls on your lap. You may only have to be responsible for some of the bill, if at all! Check for warranties before you act!
#2 Tap into your emergency fund.
It’s no fun to meet with an expense you didn’t plan for. These days, they’re everywhere! Just look at the few that may be in your horizon:
- higher gas costs
- higher food costs
- higher insurance premiums
- home repair bills
- higher taxes
- sudden job loss
- short term illness
- boomerang kids seeking temporary shelter
You can address unexpected costs and turn them into something less problematic by planning for them. Unfortunately, these costs will always be around to haunt us, so by anticipating them and building the savings to cover them, we’ll be less stressed when they do happen. Having three to six months worth of living expenses (preferably more) in a conservative account would be a good ballpark amount to fall back on.
#3 Make room in your budget.
Another way to create that emergency fund: you can dedicate a section of your budget to unknown or unexpected expenses. By carving out a phantom category for emergencies into your overall budget, you will be prepared to address sudden costs when they happen.
#4 Forego a planned purchase.
Perhaps you don’t have an emergency fund, nor a built in category in your budget for “surprise expenses”. But redeploying savings is an effective tactic for dealing with emergencies. I know some people who “piggyback” their emergency fund onto other budget categories that they’re saving for. For example, if you’re already saving up for a planned purchase or goal, then for certain circumstances, it may make sense to reroute some of your savings from those goals to your unexpected bills. Of course, this means that you’ll need to rebuild your savings for those goals later, but it’s a matter of addressing priority issues as they happen. Make sure to eventually replenish any savings that you raid for that rainy day. This will mean that you’ll have to forego one of your planned purchases for a little bit longer. If this is something you can muster, then it’s a decent way to find the money to pay your surprise bill.
In our case, we’ve once postponed a big trip because of a series of unplanned expenses. It’s easy for bills to creep up on us and to set us back a bit, but this kind of discipline is what keeps us out of debt.
#5 Toss your investment losses.
If you’ve got some investments that aren’t doing too well, here’s your chance to unload them! Getting rid of your underperformers has its advantages, including providing you with a tax break and the relief that they’re no longer weighing down your portfolio. If you need to rebalance your portfolio anyway, you can trade your losers for cash that can go towards your short-term emergency fund.
This concept is called “tax loss harvesting”, also widely known as “tax selling”. By employing this tactic, you’ll be able to minimize taxes on your investment gains since you can offset them with the losses you realize when you unload your losers. Consequently, you’ll lower the taxes you owe on the gains you’ve made for the year. You can read up on this further in this article by Investopedia.
If your emergency fund appears in need of an additional cash infusion, why not salvage some of that losing investment and move what’s left to cash?
#6 Sell clutter for extra cash.
These days, it’s getting easier and easier to trade in your used items for some extra cash. If you’re short on cash you need immediately, you may be able to garner a quick sale by putting something up on eBay or Craigslist.
#7 Consider some forms of debt.
Be very careful with this! Though there is no option for many of us but to get into debt to take care of sudden expenses, knowledge of what type of debt to take on is important, as dangerous loans are available and offered to the unsuspecting who are in dire straits. Do you have good debt sources available to you? Be selective about the sources of funds available to you. You may be tempted to hit up kind and generous family members, to resort to your HELOC or a payday loan, or to run to your social lending community for financial assistance, but be careful that it doesn’t turn into a habit.
Money Sources You Should Avoid
Don’t get caught with bad debt or those truly awful loans that will charge you an arm and a leg to borrow. I wrote a piece on this kind of debt a while ago called “Loans to Handle With Care“. As I mention in this piece, I urge you to think twice before taking on these kinds of loans, many of which are considered predatory.
Here are additional thoughts I had on the subject of managing an emergency fund.
Created June 30, 2008. Updated April 27, 2012. Copyright © 2012 The Digerati Life. All Rights Reserved.
{ 15 comments… read them below or add one }
Good job: first thing is replenish the emergency fund you just raided. Second thing, IMHO, is to add the thing you just raided it for (the computer) to your savings budget — figure it’s got a lifespan of, say, 2.5 yrs, divide price by that time, and start putting that much more into savings, tagged for “new computer” usage. So that’s something like $100/mo or so to save up for a nice MacBook Pro in that time.
PJ,
Great suggestions! That’s an excellent way to be very proactive about affording replaceable items in our lives.
For instance, one should budget for “home repairs” every year even if you don’t use up your savings on repairs on a regular basis. There may be one year when your cumulative savings will be used all at once!
I try to find room in my budget to cash flow the emergency if at all possible, simply because I hate using the emergency fund (yes, even in true emergencies). It is great to have a buffer there to keep me from turning to the credit card again.
You are absolutely right about tapping the emergency fund that is what it is for. You could possibly create a sinking fund to keep all computer problems at bay since this is your livelihood.
NEVER use a credit card, I haven’t in years. With some good budget training, anything is possible. I have ten children and owe nothing except a mortgage.
Here’s what I do — it may help you. I replace my computer, no matter what, every 24 months. I have both a laptop and a desktop, and I have them set off by a year, so every May I end up replacing one or the other.
This was unfortunate timing this year as in April, the motherboard on my desktop computer died, throwing the schedule off by a month — so I may keep this current desktop 25 months. 😉 It doesn’t completely eliminate computer failures, as my April saga shows — but it does lessen them significantly.
One thing you can do is divide the expected cost of the computer by the number of months you will keep it and make sure to put that money in your fund every month. I typically spend about $1300 on a desktop and $2400-$2700 on a laptop. Also, if you buy a warranty (I hand-build my desktops, but buy Lenovo laptops), make sure it covers the expected life of the computer.
I recommend the every-24-months rule to anyone whose computer makes them money. When you add it all up, it’s not a huge expense monthly for something that is key to your income.
-Erica
Erica,
Thanks so much for the interesting feedback!
Your suggestion is quite intriguing, although I do find it… slightly aggressive maybe (but maybe not for a bigger business and definitely not for your average company)? I’ve had computers stay with me for some three years or so with no issues and I insure and preserve my data/information/work via regular backups. Then again, 24 months may not be as far-fetched as it sounds given the changes in technology these days and how much cheaper they get over time…
I also use Mozy to backup my entire environment for a few cents a day I believe…. then I try to ride my machines to the ground for maximum affordability.
But it’s really interesting you’ve got this system to cover your business. It sounds like a great way to minimize the stress you feel when your computer completely dies out. Hmmm… I may want to adapt this stance, though maybe I’ll lengthen the replacement cycle to 2.5 or 3 years….
Great tip! I’m always curious about how people run their online businesses!
I would have to disagree 1000% with Joe. It is perfectly fine to use a credit card. Just because that advice works for one does not mean that it applies to all. I happen to be a staunch believer in credit as long as it is used wisely and responsibly, and it can provide a great many benefits.
As for the original post, there are some very good points made, however if a good emergency fund (ie: 6-8 months of expenses) is in place, almost anything can be paid out of it. I wrote a post a few weeks back on the subject myself.
One thing that was not mentioned that would certainly alleviate any financial pain would be to live below one’s means. This way there is the ability to adjust to unexpected increases in expenses or one-time issues more easily without the worry of running out of money.
Eh, avoid having to pay for car repairs altogether – buy an extended car warranty from a decent company.
Don’t make the mistake of buying an extended car warranty from the dealership. Dealerships mark up the prices of their warranties from 40% to 75%. You can save a ton of cash and keep your car longer if you buy a car warranty from a company that specializes in sales of same – and you can buy them at any time, not just when you buy your car.
To kevin thompson … Service contracts vs. Extended warranty .. Know what you are buying. Yes there is mark up on warranties and insurance. Even the ring or necklace you may have bought. Everything has a mark up. Ever work in the furniture business? Anyway, eighty percent of my customers have purchased a service contract for unexpected repairs on their cars. Why?? Because instead of covering only defects it covers wear and tear on vehicles. Budget thirty dollars a month to protect unexpected repairs. You have to know what you are buying. With cars in today’s markets the local repair shop can not fix these problems because of computer read outs they don’t have access to. And forget about Uncle Joe repairing it… Save time, money and effort. And buying it at the time of purchase you can buy more protection with all benefits no deductible. If you wait its more money out of pocket with limited coverage. And always research the company that claims they pay it all. Third parties can go bankrupt leaving you with an expensive contract that is no longer valid. Buying from the dealership guarantees protection and claims being paid without having to fight with the contract company the dealer handles all claims to make sure you are protected.
Also, extended warranties generally only cover manufacturer defects. Buyer beware on Circuit City, Best Buy and even Walmart. They only mirror what the company already covers but for a longer period, which does no good when the equipment now a days on electronics is obsolete within the two year period anyway. A car is the second largest purchase you make in a life time; protect and make what was once a liability and turn it into an asset. Now you only budget for one payment. What if something happens to the car? Re service contracts: next time you buy a car ask your finance manager the difference.
Certain situations in your life call for drastic measures and this is where emergency credit cards come. But since credit card use can make or break a credit score devise a budget to manage your spending and use the credit card only in case of crisis.
Very Interesting. I have had my computer for over five years simply because it will do what I want it to do. If I experience any issues, I use software to clean my machine. I used to take my machine to a repair specialist that would charge me ££££ just by using the same software I use today. Why spend if you don’t need to? Everything is so easily disposable these days so people don’t bother taking care of their possessions. If they did, they’d last longer.
The best way to handle any emergency is by being prepared. If you are organized, then you are ready to face any challenge that comes up. Save for it, budget for it, use credit, plan ahead, have a warranty… all of them can be suitable to cover the emergency. It boils down to being ready to tackle the emergency the best way you can.
@Derek,
That pretty much summarizes it. Unfortunately, not everyone is disciplined enough to be prepared and most people procrastinate or put things aside thinking they’d rather take risks (of an emergency happening) than bother with planning. For “natural planners”, it’s obviously not an issue, but for those who’d rather not think about the worst, it can actually be difficult to get them ready for what may happen down the road. A lot of folks don’t want to bother with the possibility of facing unpleasant events and would rather put things off until something actually does happen. A lot of them will say “I’ll cross the bridge when I get there!”
Personally I like to make a small savings line in my budget for unexpected expenses and keep funding it until it reaches $1,000. My emergency fund is for a real emergency like losing a job. Unexpected expenses come out of the unexpected expense fund.