How to Manage Unexpected Expenses Without Going Into Debt

Do one thing: If you don’t have an emergency fund, start now by setting aside a small amount every week in a separate account from the one you use to pay your monthly bills. If you tuck away just $10 a week, you can save $520 in 12 months.

Plan Now to Avoid Debt Later

Unexpected expenses can feel like the arch nemeses you never wanted in your life. They show up when you least expect them, busting budgets and wrecking your peace of mind. 

Shortage of Savings

And with debt levels already at record highs in the U.S., it’s little wonder that new research shows a majority of Americans say they don’t have enough in savings to cover an unexpected $1,000 emergency expense. (When more than 1,000 adults in the U.S. were asked about their ability to handle a surprise bill, 59% said they didn’t have enough tucked away to pay it off immediately.)

Manage Emergencies Without Debt

Fortunately, there are ways to manage financial emergencies big and small without relying on high-interest credit cards or taking on other forms of debt. “These emergencies or unexpected expenses are part of life and they can derail (people) from achieving their dreams,” says Michelle Brow, a fee-only advisor at Full Bloom Financial in Michigan. “We should assume unexpected expenses will occur and make sure to plan for them.”

Stash Cash In a Rainy Day Fund

One of the best ways to prepare for unexpected expenses is to save money before you need it. When you are already on a tight budget, this can be easier said than done of course. Brow says stowing cash reserves in a savings account that’s not invested is a sound way to guard against going into debt. If money is already tight, start out small, as suggested above, and set aside $10 or $20 a week. When you are able to afford more, increase the amount you save from every paycheck.

How Much Do You Need In Emergency Savings? 

For years, the rule of thumb was to have three- to six-months’ worth of basic living expenses saved in case of an emergency, such as a job loss. Today, how much you need to have saved depends on a few factors including:

• The number of people that rely on your income
• The number of revenue streams coming in
• How close you are to retirement

And data from the banking industry suggests you may only need about six weeks’ worth of income saved up to handle a financial crisis. While there’s no doubt having more saved is better, it’s important to start where you are and go from there.   

Consider a Money Market Account

Brett Croft, CFP, CFA, owner of Croft Financial Planning, LLC, says that even better than a regular savings account for an emergency fund is a money market fund (or account) because you often have the ability to earn more interest and still have easy access to your money. If you already have an account, make sure to ask your financial institution to give you the rate they are offering new customers, if that happens to be higher than what your account is earning. 

Automate Savings

Another saving pro tip? Always automate your savings by setting up an electronic transfer to withdraw funds from your main checking account every pay period and deposit the funds into a separate account earmarked for emergencies. While you don’t want to set it and forget about it completely, the less you think about that growing pile of cash, the less likely you will be to spend it. 

Make Sure You Have Enough Insurance

Another way to protect against unexpected expenses – and the emergencies that often precede them – is to make sure you have enough insurance to weather life’s storms.

“Insurance is a cost effective way to prevent debt,” notes Brow, who says she works with clients to ensure they have adequate coverage on everything from home and auto to health and life insurance to short-term and long-term disability policies.

She said short and long-term disability plans ideally should cover 60 to 70% of your monthly gross income. One strategy for more affordable coverage is to buy what your employer offers and then supplement that with a private policy. For those 55 and older, she also suggests researching long-term care insurance.

Strategies for Building an Emergency Fund

We get it. Not everyone may be earning enough at their current job to be able to set aside money every payday. If that’s the case, you may want to consider taking on a part time gig in addition to your other employment  – even temporarily – and move all of those additional earnings into a savings account. There are dozens and dozens of ways to earn extra income these days that you can accomplish on nights and weekends or other times when you aren’t already working. 

The important thing is to take the first step and get started, so you can start to watch your savings grow and feel your stress over money to subside. 

With reporting by Casandra Andrews