3 Ways to Handle Unexpected Expenses

by Miranda Marquit · 8 comments

emergency
We all end up in situations where we have unexpected expenses. This subject is especially poignant for me this year because my husband asked for a divorce back in May, and that resulted in some major costs that I wasn’t expecting.

I was fortunate in many ways, considering the situation. My ex wasn’t interested in fighting over resources. Instead, he just wanted things to move as smoothly as possible. All he wanted was some help setting up his own living situation and asked nothing beyond that. I ended up moving across the country, and that was an expense, but I was able to handle it.

As I thought about how I made it through the divorce with my finances intact, I realized that I used three different strategies to handle my unexpected expenses:

1. Emergency Savings

First of all, it’s worth noting that I keep an emergency fund. My emergency fund is a little unconventional in that the bulk of it remains in a taxable investment account, invested in an index fund that follows the S&P 500. I keep three weeks’ worth of expenses in a high-yield savings account, but the rest of it is invested. I was able to tap into my emergency assets to get access to the immediate capital I needed.

2. Line of Credit

Even though I could have used the emergency savings to cover everything, I decided I didn’t want to deplete things that far. I turned to a line of credit. If you can get a relatively low rate, it might be worth it to use a line of credit to help manage unexpected expenses. It can be a way to smooth cash flow, as well as prevent you from completely drawing down your emergency fund. I was able to keep the low rate and pay off what I borrowed relatively quickly, so the interest didn’t make a dent in my finances (since it was largely neutralized by my investment returns on the emergency fund).

3. Help from Others

I am fortunate that I have a good support system. Even though I paid most of the unexpected expenses myself, using my amassed assets or my access to cheap credit, I did get some help from others. When I first moved to town, my parents generously let my son and me stay at their house until I found a place of my own. When I did secure a rental, my parents took us shopping and bought a number of household items for us, including cleaning supplies, paper supplies, and some kitchen staples. It was a kind gesture that reduced the amount of money I had to spend outfitting my new home.

When you run into unexpected expenses or a financial emergency, stop and think about the resources you have available to you. There are a number of ways to look for help, whether it’s a local religious congregation or community group, or whether it’s friends and family. You should also plan ahead now, building your emergency assets and working on building good credit so that you have more low-cost options when you need access to capital.

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{ 8 comments… read them below or add one }

John Kane January 5, 2016 at 7:09 pm

Ding, ding, ding, we have a winner!

#1 Emergency Savings. Always try and keep something in reserve, the best advice.

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David Ning January 10, 2016 at 2:44 pm

Yup. You just never know when you need cash in a hurry.

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Larry Newman April 11, 2016 at 6:57 am

How much percent of your money should you keep in emergency savings? LN.

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Dave January 6, 2016 at 8:41 am

Great article Miranda! I think a lot of people don’t even think that an event will come up that might deplete their funds. I really like the idea of setting up an emergency fund. I definitely think three weeks is enough time to figure out a way to start making more money if necessary.

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David Ning January 10, 2016 at 2:44 pm

Most accidents are unlikely events but that doesn’t mean they never occur. You certainly don’t want to let one unfortunate event ruin your finances.

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Katie January 8, 2016 at 10:53 am

What’s the difference between a line of credit and a credit card?

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David Ning January 10, 2016 at 2:02 pm

The only difference is really how you can use a credit card to pay versus a line of credit where it usually comes with checks or some lines let you electronically transfer money elsewhere. Most lines have lower interests costs than the loan you get with credit cards as well.

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Matthew Metcalfe January 11, 2016 at 5:53 am

Awesome stuff Miranda excellent tips. I have always thought it is important to keep an extra amount in savings just in case for emergencies. I had a friend whose dad had a stroke and had to go into full time care and he struggled to find the money to support his father. Ultimately he Maxed out his Credit card which was a costly mistake.
Thanks again,
Matthew Metcalfe
smartermoneyhabits.com

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