August 6th, 2013
In an ideal world, you would have a savings account set up with three month’s worth of expenses in order to cover being out of work (although, some recommend 6 months or more if you have a career that is more difficult to be placed in like upper management).
But what do you do when you have an unforeseen expense?
This situation gets more complicated if you’re already retired or on a fixed income.
Often when you remodel your home, especially rooms like bathrooms and kitchens, hidden damage like water damage and dry rot are only found after tile and counters are pulled up. And that will increase the overall cost of the remodeling. You can talk with the contractor and have a not to exceeds clause put in and anticipate problems before they start. Or you can save additional money before you start the upgrade.
If you’re completely remodeling or adding on to your home, you will need to save up additional funds for a place to rent if you can’t live in your home.
Many people overspend their first year of retirement. They’re used to having regular income, or they’re trilled to start living their dreams and take up expensive hobbies like flying or sailing, cruises around the world, and eating out more often. Remember to keep in mind that retirement is a marathon and not a sprint, and spend money conscientiously.
Also, if you have an adult child that needs help, consider all of the options before bailing them out. If you have to spend a lot of money now, will they be in a position to help pay you back when you’re low on funds? And will the bail out really help them solve what happened to get them into that situation?
If you have an accident, would you have the funds to cover the deductible? You get sick and have to pay your co-pay for an office visit and meds. So how do you recover when you don’t have that much left in the bank?
First, look up what you can give up in the short term like your morning coffee. Remind yourself that it’s not forever, and it will be easier to stick with. Then prioritize your expenses as to what has to be paid and how much each month.
If you had to use your credit card, figure out how much you have to pay, and look into how you can pay it off in one month, three months and six months, and how much money you would have to come up with. Don’t forget to plan in interest charges. If you can avoid carrying a balance on your credit card, it would be better. That way, you don’t start down that path of increased balances month after month.
Also, contact the lender and see if you can renegotiate the interest rate and payment.
Look into the possibility of borrowing against your 401k for a short time if needed.
Regularly monitor how you’re doing to ensure you’re paying things off and reaching your goal.
Look into areas where you can back off for a few months such as television services, dry cleaning, raise deductibles on insurance, etc.
Then, after you’ve paid off the emergency, consider keeping your expenses a little lower and start saving into an emergencies fund.
The bottom line is to plan ahead and save a little each month until you have your emergency fund. But budgets, like diets, fail when you’re too strict, so try to budget in some fun as well.