It is often those unexpected expenses that get in the way of maintaining financial stability. You have everything in your financial house seemingly in order when suddenly, without warning, something happen. We have all been there. The thing is this: you can plan for unexpected expenses even though you don’t know when they will occur.
For starters, embrace the mindset of expecting the unexpected. In other words, do not lull yourself to financial sleep by assuming that you will always have enough money to pay for everything you need. Embrace the reality that things happen.
With that mindset, you can start devising strategies to protect yourself. Some of them are described below. Whatever you do, don’t continue living under the assumption that preparation is unnecessary. It is, unless you want unexpected expenses to but you in a financial hole.
Set up Automatic Savings
The first and most important thing anyone can do to prepare for unexpected expenses is to set up an automatic savings plan. To do this, you will need both a checking and savings account. It is best to have them with the same bank or credit union, but separate institutions will do in a pinch.
Your checking account is your main cash account. Have your paycheck direct deposited into the account. Next, link the accounts together and create an automatic transfer that sends money from your checking account to your savings account on a specified date.
The point here is to treat saving like paying a bill. Just like you’ve set up automatic bill pay so that you don’t forget, you can set up automatic saving so that you don’t forget that either. Saving just $25 per week can go a long way toward offsetting unexpected expenses.
Work on Building Good Credit
Sometimes unexpected expenses exceed the amount you have in your savings account. Such scenarios are really when you need credit most. So the next tip is to start building good credit now, so that in the event of an emergency, you’ll actually be able to get a loan or a credit card.
A good way to start building credit is to get a secured credit card or a store credit card. Use it and pay the bill in full every month. Even a few minor purchases bought and paid for on a monthly basis will build a credit history in your favor.
After 6 to 8 months of this practice, step up your game and apply for a regular credit card, then repeat the process. All the while make sure that you pay all your bills on time. Within 12 to 18 months, you should have a fairly solid credit rating.
Get Ahead on Your Mortgage
Assuming you have a mortgage, you can get ahead of it by making extra payments throughout the year. Doing so will reduce your payments for the coming year because you will have less principle and lower interest payments. The trick here is to not make extra monthly payments but, rather, extra principal payments. Such payments reduce the total amount of money you owe. In turn, that reduces the amount of interest you pay.
Next year, when your mortgage payments drop, take the difference and put it into savings. It will not harm your budget because you’ve already planned for the higher amount. The money you saved by reducing your payments can be added to your savings account with the automatically saved funds.
Planning for unexpected expenses is really just adopting a mindset of saving. Put away whatever you can for a rainy day. You are going to need it. We all do.