“It’s going to cost at least $7,000” the plumber told me.
Cue that sinking feeling where you ask yourself “why me?”
$7,000 was the quote I received for fixing a broken sewer drain-out, which was located about 15 feet underground, below the sidewalk in front of our house. And it was the dead of Winter in Minnesota, making it even more difficult to reach.
This was within the first year of owning my home. We had already faced broken garage door springs and a flooded basement when the sewer issue came up.
Unexpected expenses can cost anywhere from a few dollars to many thousands of dollars.
Some are more painful than others, but regardless of the cost no one enjoys getting hit with one.
I’m going to walk you through the options available for dealing with a large unexpected expense. But before we do that, a quick note on emergency funds, including Health Savings Accounts (HSAs). I’m assuming if you are reading this you either already tapped into these sources, or you don’t have these accounts to tap into. Later on we will talk about both emergency funds and HSAs in more detail, but for now we’ll exclude them from the list of options.
Step 1: Make a Plan for Paying off the Debt (and Avoid Defaulting on It)
The first thing you will want to do when hit with an unexpected expense is figure out how you are going to pay for it. You may not have the funds now, but you’ll want to figure out how you are going to fund the costs, what interest rate you will pay, and how many months or years it will take to eliminate the debt. Here are a few options available to you.
Work out a Payment Plan with the Company
Sometimes working out a payment plan with the company is the best option. Let’s say you have a $1,000 bill. If you know you can afford $100 a month (or more if you aggressively attack the debt), and the company offers you a payment plan of $100 a month for ten months, it could be the best option.
Not every company is going to offer a payment plan, but if they do you should pay close attention to interest rate. In the $100 a month for ten months I described above, the interest rate would be 0%. But some companies may try to take advantage of you and charge high interest rates, perhaps even as much as 20%. In this case you should take advantage of other options.
Use a 0% Intro APR Credit Card
A 0% intro APR credit card could be a good option for dealing with an unexpected expense. With these cards, you get 0% interest for a certain period of time from account opening, such as 15 months, and then the interest rate will revert back to a traditional credit card interest rate (i.e. 18%, 20%, etc.).
To put it simply, you won’t pay any interest on the balance during that introductory period. Depending on the amount of your unexpected expense, this could be enough time to pay off the balance in full. If it isn’t enough time, you could transfer the balance to another 0% interest credit card (there will likely be a fee for the transfer of somewhere around 3%). Alternatively you could take out a personal loan, which we’ll talk about next, for whatever balance is left.
One good option is the Chase Freedom®. This card offers an introductory period of 15 months where you will receive 0% interest. Among other benefits that come with the card, you will also get a $200 bonus once you spend $500 on the card within 3 months of account opening. If you want to see all your options, you can compare this card with other 0% intro APR credit cards.
A quick word of warning with the 0% intro APR credit card. Many people take advantage of them but end up not making progress on the debt. The introductory period can feel like a long time, causing people to feel less motivated to work towards paying off their balance. Before they know it the introductory period is up and they are getting hit with large interest charges. If you take advantage of a 0% intro APR credit card, you need to stay motivated so this doesn’t end up happening to you.
Get a Personal Loan<
An alternative to a credit card is a personal loan. The interest rate you will pay on a personal loan will depend on your credit history and, in turn, your credit score. If you have excellent credit you will get lower interest rates. You’ll pay more – sometimes a lot more – in interest depending on whether your credit is good, average, poor, or bad.
What is a good credit score? Here’s a general breakdown:
Less than 500: Very Bad
500-549: Bad
550-599: Poor
600-649: Fair
650-699: Good
700-749: Very Good
750 and up: Excellent
If you don’t know your credit score, most credit cards today offer it for free within the dashboard when you log into your account.
The best way to get a personal loan is to get quotes online. You will want to get quotes from a few different lenders to see which one is best. We recommend using Credible, which gives you quotes from multiple lenders all in one place.
I personally used Credible when I refinanced my student loans and liked how there were quotes from multiple lenders in one place instead of having to go to each lender individually.
Other Options
These are a few options for dealing with an unexpected expenses but they aren’t all the options. A couple other options worth mentioning are GoFundMe and your family.
GoFundMe. I’ve mentioned before that my biggest concern for millennials is health care costs. It would be more accurate if I said this was my biggest concern for all Americans.
High Deductible Health Plans, or HDHPs, are becoming the norm. While HDHPs offer lower premiums, they also require policyholders to pay a large amount, typically thousands of dollars, before their health insurance kicks in.
Not surprisingly, more and more people with unexpected medical bills are creating GoFundMe pages. The CEO of GoFundMe told CBS News that one-third of all donations made on GoFundMe go towards health care costs. I’ve donated to a GoFundMe for medical expenses, you may have as well. Given how the healthcare system is set up, this trend likely isn’t going to change.
Family. My goal in this post is to not limit your options, and many will disagree with asking family for help, or are just too dang stubborn to even consider it. But it is an option. If you are really struggling, family may be able to offer you a 0% interest loan, or may just gift you the amount you need.
With that being said, there is a huge risk in mixing family and money. Money is a contributing factor in many divorces and can cause conflict with your extended family as well. The approach I’ve taken is providing information (like this blog post) to family members instead of lending or gifting money.
Get Multiple Quotes. Some expenses aren’t locked in. For example, at the beginning of this post I mentioned receiving a $7,000 quote from a plumber. By signing up for Angie’s List (which I now swear by as a homeowner) I found another plumber. He was able to get the city to pay for the entire repair. The first plumber said not to bother reaching out to the city. With large unexpected expenses it can help to take a deep breathe. The first plumber was pushy AF and gave me a bad vibe. You can read the full story in this post about getting multiple quotes.
He knew I was a newer homeowner and tried to take advantage of it. If you aren’t locked into an expense, shop around and get multiple opinions and quotes, if possible.
This extends beyond home repairs. It’s not as easy, but with some medical procedures you can shop around. I was referred to get a CT scan by a specialist. The place I was referred to would have billed me $1,000. I went to a different place that billed $350. The CT scan was the same quality and provided my specialist the information they needed. The only difference was I saved $650.
Step 2: Look for Opportunities to Increase Cash Flow
Once you chose an option for dealing with your unexpected expenses, there are a few things you can do to speed up paying off the debt. All of the following are potential opportunities for increasing your cash flow.
Adjust Your Retirement Contribution
Taking advantage of an employer match is usually a good idea. Let’s say you get a 100% match for every dollar you contribute to your retirement account up to six percent. In that scenario, six percent would be the minimum you want to contribute, since you are getting a 100% return for each dollar you contribute.
But let’s say you are contributing ten or fifteen percent. If your employer only matches up to six percent you can (temporarily) lower your retirement contributions down to six percent until you have paid off the debt you incurred from the unexpected expense. I would also recommend keeping the contribution amount lower until you’ve built up a healthy emergency fund. At that point you can increase the contribution percentage up higher.
Look for Opportunities to Cut Expenses
Opportunities to cut expenses will always be highly personal. For example, cutting out a daily $5 Starbucks coffee will have a different psychological impact for each person. For one person it may not be that big of a deal and they are fine with brewing coffee at home. For another person it may be their one luxury they allow themselves, so cutting it out could really hurt their mood and mental health.
Because of this personal aspect of spending, when it comes to opportunities to cut expenses I try to keep my comments general, or give a number of options. To help you brainstorm ideas check out this post sharing 30 ways to save money each month.
Make Money Through a Side Hustle
I have been a big proponent of side hustles over the years, and have shared the 10+ I personally have tried. But I also recognize that not everyone’s life is conducive to a side hustle. If you work long hours at your day job and are exhausted when you come home, a side hustle will be difficult. If your day job is in a slow period or doesn’t take as much energy, a side hustle may be worth trying.
As you probably already know, a side hustle is any way to make extra money above and beyond your 9-5. It can be as simple as a second job and as complex as launching a start-up. Here’s 50+ online and at-home side hustles to help you brainstorm.
I also need to mention that *sometimes* it’s easier to increase your pay at your 9-5 than it is to make money through a side hustle. For example, making $5k more at a 9-5 through salary negotiations could be a lot easier than the hours and hours it would take to pull in $5k through a side hustle. It’s worth spending a little time comparing your compensation to crowd-sourced salary data to see if there is an opportunity to negotiate higher pay.
Step 3: Make a Plan for the Future
We have one last thing to cover, and that’s how to be better prepared for future unexpected expenses. The unfortunate reality is that we can reasonably expect that things like car repairs, home repairs, and medical bills will happen randomly and (usually) when we least expect it. It’s easier said than done to hoard cash in a bank account, but it definitely can have a big impact on your financial life, not to mention your mental health.
Build an Emergency Fund
Along with creating a plan for repaying our student loans, building an emergency fund is one of the best things my wife and I have done for our financial life. It doesn’t take away all stress around money and finances, but it certainly helps you sleep better at night.
For many who are starting from little to nothing in savings the prospect of building an emergency fund with three to six months of expenses seems like a nearly impossible task. That’s why I like to break it down into smaller goals. Start with $100 in savings. Then target $500. Then $1,000. The point is that saving something is better than nothing, and the best time to get started is now.
I reccomend starting a separate savings account for your emergency fund for two reasons. The first is that you will get a better interest rate on a savings account with an online bank than with one that has to support brick and mortar locations. The second is that it creates an extra step to withdraw your money. For our emergency fund at CIT Bank I need to set up a transfer to my home bank’s checking account. When I had a savings account at my home bank transfers were instant between my savings and checking, which creates more of a temptation to raid it for things that weren’t truly emergencies.
Think of Other Potential Unexpected Expenses
Most people learn the hard way that big medical bills can happen at any time. Yes, you could go years without having to see a specialist, but you may need to see one next week. Emergency room visits are by definition unplanned for most people. And while you can sometimes delay surgeries for a while, typically you can only delay them for so long.
As I mentioned earlier, we know that High Deductible Health Plans are becoming more common. You know that at any time you could be on the hook for a few thousand dollars worth of medical expenses. It makes sense, then, to set aside money for those potential costs. A Health Savings Accounts is a great way to do that. My wife and I had three straight years where one of us had a surgery. We learned quickly how important it was to have the money set aside ahead of time so we could approach our medical decisions with a clear mind.
Unexpected expenses can happen with your pets, your home, your car, and other areas of your life. Building an emergency fund is the first way to protect yourself against these costs, but it also makes sense to prepare yourself for costs. If you have a house, for example, your roof/water heater/washer/dryer/etc. isn’t going to last forever. Yes, you may not know when these costs will come up, but you know they will at some point.
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I’m glad to be debt free because int he last months I had so many unexpected expenses…however plan and organization is the key now I’m focused on savings!!!