Have an emergency? Find the money from both expected and unexpected places! And you don’t have to wait for another stimulus check to bail you out…
Yesterday, 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, gracing my monitor with the dreaded Windows blue screen.
I knew my computer was on its last legs, given its shelf life and how long I’d been running it, but what kept me from getting a new one were the standard arguments I’ve had with my “digerati spouse” about what new computer to get as a replacement. He’s a Mac guy while I have an attachment to PCs, a consequence of working in corporate America for so long — where 99%(?) of office computers are on the Windows OS.
Because we couldn’t agree and I wasn’t ready for the disruption I’d face if I made the shift to a new machine (even though it would be a dual boot), we procrastinated on making the replacement. We also hesitated on this purchase because of the cost, given many big expenses we’ve been facing this summer, which I’ll write about more in future posts.
In the end, my old DELL decided everything for us by keeling over this weekend, causing us to scramble for that replacement. I acquiesced and we got a Mac. But it’s still money I wish I didn’t have to spend just yet. 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:
Ways To Deal With An Unexpected Expense
#1 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 (maximum impact depends on who wins the election!)
But 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 in a good high interest account is a good ballpark amount to keep in your emergency savings fund — if you don’t have one now, you can start one up with your economic stimulus check!
#2 Use your credit card.
I’ve related this story before, about talking with a colleague sometime ago when I was still employed at my previous job. We discussed the issue of emergency funds and I asked him how large a fund he had. I expected a straight up answer from him of “oh, around a few month’s worth of expenses.” He made good money after all. Imagine my surprise when this fellow, a guy with a good-sized family comprised of a wife and 3 young children, replied to me with a wink: hey, I’ve got the best cash back credit cards around!
Sounds like there are people who prefer to rely on credit cards for their emergencies, regardless of whether they can afford an emergency fund. Well, if you’re going to use credit cards for your emergency, get the best credit cards around — those with low interest rates, good terms and rewards!
#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 have their emergency fund actually piggyback onto other budget categories that they’re saving for. For example, if you’re already saving up for a planned purchase or goal, then it may just be a matter of rerouting your savings from those goals to your unexpected bills. This may mean foregoing 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, with the myriad miscellaneous expenses we’re ringing up this summer, we’ve scrapped any big travel plans for the year. Instead of traveling, we’re paying our bills!
#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.
Check out the concept of tax loss harvesting:
Tax-loss harvesting, also commonly known as tax selling, is one of the ways to avoid taxes on some of your portfolio gains. Tax-loss harvesting is the selling of securities, usually at year-end, to realize portfolio losses, which an investor can use to offset capital gains and therefore lower personal tax liability.
#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 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.
As for my own emergency… After unwrapping the new Mac, I’m now busy trying to get my work environment up and running as I recover my files, resurrect my email, reload my applications and learn my way around new hardware.
After this, we’re making sure we replenish the emergency fund we just raided for this rainy day.
Here are more ways to build an emergency fund.
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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 runing 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 INSURANCES .. EVEN THE RING OR NECKLACE YOU MAY HAVE BOUGHT.. EVERYTHING HAS A MARK UP . EVER WORK IN THE FURNITUR BUSINES ?? 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 TODAYS MARKETS THE LOCAL REPAIR SHOP CAN NOT FIX THESE PROBLEMS BECAUSE OF COMPUTER READ OUTS THEY DONT HAVE ACCESS TO . AND FORGET ABOUT UNCLE JOE REPAIRING IT … SAVE TIME MONEY AND EFFORT. AND BUYING IT AT THE TIME OF PURCASE 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 CONTARCT 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 WAL MART … 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 ?? WITH 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.