On Unexpected Expenses

The situation Saturday ended up going better than I could have hoped for. Thanks to some very sweet anniversary gifts, not only did we get to replace the window, but we also got to go the movies on Saturday night. It was incredibly sweet.

But it brings up the subject of unexpected expenses. If you're so tight you're barely able to get through the month, and you're trying to get out of debt on top of that, what are your options? How should you figure unexpected expenses into your budget?

Having a plan will take some of the nail-biting out of each month--your heart should only be racing when you're exercising.

You have a few different choices.

1. Leave some elasticity in your budget. Make sure, when you create your budget for the month, that there is a certain amount of each check set aside specifically for problems.

Pros: The money is available each month. Also, if a utility bill or two turns out to be more expensive than you expected, you're still covered.

Cons: The amount you're able to set aside each month will probably be pretty small--smaller than your typical emergency cost.

2. Get $1,000 set aside for emergencies. Do whatever you have to--sell something, cash out something, scrounge it up, whatever you have to do--in order to get $1,000 cash ready to go for emergencies. This is what Dave Ramsey recommends, and he does recommend it be cash, the one form of currency that's still good everywhere.

Pros: The mere process of getting the $1,000 together will teach you that you have access to money in more ways than you think. And knowing you have $1,000 ready to go to pay for an emergency room trip or whatever other thing cropped up--well, let's just say you can sleep the sleep of the just.

Cons: Depending on what your highest interest debt is, and how much you owe on it, that $1,000 could be costing you more than $250 a year in interest.

3. Keep a credit card for emergencies. Two things make a good emergency credit card--low interest rates, and low spending limits. The low limit puts pressure on you to pay it off before the next emergency--and the low interest rate saves you money. If you pay it off before the first billing cycle, that first month will often be interest free.

Pros: The maximum amount of money is put towards debt reduction each month. This emergency tool only costs you interest if you use it.

Cons: It's still a credit card, and inability to discipline yourself with a credit card may be what got you in a bad financial situation in the first place. If you max out every card you get your hands on, this option probably isn't for you. And if you don't have extra money to pay it down figured into your budget, how would you pay it anyway?

What's the best one? Who knows. As you can see, they all have their advantages and disadvantages. What you should think about is what type of system you used before you changed your financial outlook, and try to recreate that without the pain.

For example, if a $300 payday loan usually took care of you, then wait for a month where you didn't need to get one, and set aside the $300 you would have given the payday loan company if there'd been an emergency. Now, the next time there's an emergency you can borrow from yourself. If you have the discipline to pay yourself back as faithfully as you would the payday loan company, you'll never have to use them again.

As for me, I'm trying a combination of the three. I have a certain amount factored into the budget for unexpected expenses. Since I don't know how soon I can scrounge up the $1,000, for right now I have a credit card with a low interest rate and a $500 limit I know is there for me. Once I scrounge up the $1,000, I'll probably stick with that--the $200 or so dollars a year in interest it costs me is worth it to be able to sleep at night without worrying about what I might have to pay for tomorrow.