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.