Only a few of us go through life without facing an unexpected bill that throws our finances into temporary chaos.
Whether you lose your job, face a medical emergency, or the boiler breaks down, these are all things that can tear a large hole in your bank balance.
Here is a look at how to address a financial emergency and ways to avoid the situation in the future. There are also some money saving tips and a plan of action to consider.
Resolving the problem
Financial emergencies come in many forms. Some situations become more pressing than others, but the end result is you have to find a way of resolving the problem.
If you have managed to put together some emergency savings this might be able to cover some or all of the expense. But not everyone has access to savings they can use to plug the gap in their finances. If you do have some money put aside this would be a good way to deal with the problem. You can then repay the money borrowed when you next get paid.
If this is not an option. Consider a resource like Moneyboat for a short-term loan. This will need to be repaid within a short amount of time and there will be interest charges to pay on top of the amount borrowed.
If you have money saved in a retirement account or certificate of deposit, this is a potential source of funds other than borrowing. The problem will be that there may be penalties and time delays for getting to this money. This could prove cost prohibitive and the charges for borrowing might not be very different.
Good time to look at your budget
When you find you don’t have enough money to cover an unforeseen bill, this could signal that it’s time to revisit your budget.
It is important to create a household budget, detailing exactly where all your money goes every month.
Creating a budget on a spreadsheet or even writing it down is easy to do. It is a good way to identify and reduce any unnecessary expenses. You can often find better deals on regular payments such as utilities and TV services.
It is never easy to cut back on your regular spending but you might find it possible to create some extra spare money by making some simple changes that don’t have much impact on your living standards.
Money saving tip
If you buy a coffee on the way to work each day this will add up to a significant sum that you have spent at the end of the year.
Making a coffee to go before you leave the house will be much cheaper. Even if it is a premium brand the cost of brewing will be significantly lower than the coffee shop price.
This simple measure could generate well over $1,000 of extra cash that stays in your bank. Without many sacrifices to get the sort of money that could cover an emergency repair bill.
Creating a money management plan
It feels good to have greater control over your financial situation. Creating a money management plan helps you to keep on top of your money and plan for the future.
One of the purposes of creating a money management plan is to budget for regular as well as unanticipated expenses.
The first thing to do is to list down all of your regular monthly expenses. These are the amounts that don’t vary each month like rent or mortgage payments and utilities.
The next task is to go through your bank statements to work out exactly how much you spent in the last 12 months on unexpected or seasonal expenses. This will be payments for birthdays and Christmas. It should also include any other irregular costs like school trips, kids clothes, and shoes.
The purpose of the exercise is to get a figure that you paid over and above your regular payments.
If you work out that you spent an extra $3,000 in total on unexpected expenses in the last year, use this figure as a guide to budget for the coming 12 months. Divide the total by 12 months to calculate you spend an average of $250 per month on these expenses.
If you put aside $250 each month. There will be months where you don’t spend that much. This will create an extra buffer in your bank account when you do meet an unexpected expense.
Follow these tips to lighten the burden of unexpected expenses. You will be more prepared in the future when the car breaks down or whatever else comes along.
Nicholas Krauspe writes about bettering your personal finances in his articles that appear around the internet. He is a personal finance consultant and a Father of three.