Unexpected events are by definition surprising and can cause anxious feelings in most of us.
Where it’s a positive surprise that speaks for itself, positive feelings of wellbeing usually follow.
But where it’s an unwelcome unexpected event, we can be quite shaken.
A flood or fire, a theft, a vehicle accident, or a shock health diagnosis will all create feelings that lead us to think our lives have been turned upside down.
Even something as temporary as a lightning strike taking out the electricity in our street radically changes life for a few hours or even days.
It’s similar if an essential appliance just stops working one day, such as your fridge or hot water system, or if a beloved pet gets sick.
In a day and age where everything has a cost, unexpected events usually mean unexpected expenses.
That means as well as we suffer some level of shock, the same thing can happen to our finances.
‘An unexpected expense is one that you have not planned for or previously known about,’ says Behavioural Money Coach Lea Clothier.
Even some positive surprises come with costs, such as pregnancy or when a marriage proposal gets accepted.
An unexpected windfall can radically change our financial reality, too, though that isn’t the subject of this blog.
Here we want to look at those unexpected expenses that can threaten to derail our financial plans and create financial stress.
‘It is possible to reduce the shock of unexpected expenses and the financial stress they cause,’ Ms. Clothier says.
Dealing with a sudden financial shock
If an unexpected circumstance means you owe money and can’t see how you can pay all or even some of it, the first essential point is to communicate this to the person or organisation you owe it to
‘Putting your head in the sand like an ostrich may be a temptation when faced with acute financial stress, but it won’t work,’ Ms. Clothier says.
‘Doing that could cause you more financial stress with penalty payments and fees,’ she says.
If it’s a problem, you pay to fix it; avoiding the issue till the last minute could cost you more.
Think about that: would you rather book a plumber to look at your faltering hot water system when you know it’s playing up, or call one out at 6 pm on a Sunday when they can charge whatever they want?
It’s essential to assess the priority of the expense properly, Ms. Clothier says.
‘Can it wait until next month? Is there an alternative option? Can I arrange a better payment option? Do I need to spend this amount on it? Is there a less expensive option?’
Another crucial point to make here is to avoid the temptation to borrow quick and expensive credit when faced with the debt.
We strongly advise against borrowing money to pay a debt too often that creates disempowering financial situations known as debt traps or debt spirals.
Debt spirals can lead to a life of chronic, debilitating financial stress.
So, look at all other options before borrowing to pay a debt.
It is possible to arrange a payment plan for most debts – if you contact your creditor and are very clear about what you can and cannot do.
‘Communicate with the creditor or person you owe the money to. You may be able to negotiate a payment plan or way to help you manage the expense,’ says Ms. Clothier.
Getting past an unexpected expense is likely to mean a change to your other spending for a month or so, maybe longer, as you shift money around.
To do this, you may need to cut back on spending in the short term.
If you don’t have access to cash reserves to cover this expense, and you’ve determined that the expense must be taken care of, then you’ll need to review your budget to see where you can make some changes to try and cater to this expense.
‘Review your budget – where can I cut something this month? Is anything in this not absolutely essential?’ Ms. Clothier says.
‘Can any other expenses be put off for a month?’
Before you decide to borrow money, determine if you can raise money some other way, for example, selling something of value you don’t need/use anymore?
As a last resort, you may consider asking for a temporary increase in a credit limit you already have.
Unexpected expense or unplanned expense?
This is another crucial point on this subject.
Sure, acts of God can’t be accounted for – even though most can be covered in a way that won’t financially ruin you. We’ll return to that.
But many unexpected expenses are better described as unplanned expenses. Or costs we just didn’t think through or forgot entirely.
It’s important to get honest with yourself on this point. Is there any way you could have seen this expense coming? Or was it genuinely impossible to have predicted it?
Once you start to keep better track of your expenses, you will begin to see many of these are just one-off future expenses.
Where people go wrong with unexpected expenses
The primary way we go wrong on future expenses is by regularly putting aside small amounts for more one-off significant expenditures.
‘People are often surprised by unexpected expenses such as a wedding, Christmas, holiday or even home maintenance pr repair costs,’ Ms. Clothier says.
Rather than looking ahead and thinking through what might or could happen and putting aside a regular amount towards these, people get blindsided by big bills that break their budget.
Many people take an “it won’t happen to me” approach and plan for the unexpected.
They don’t think about what could crop up financially if something were to go wrong with their health, possessions (home, car, and other assets) rather than brainstorm what could potentially go wrong and work towards creating a cash reserve or buffer that would cover this,
Borrowing to cover unexpected expenses is a significant way people make the wrong choice. That includes using credit cards.
‘Turning to high-interest credit options (such as credit cards) to manage expenses can add pressure or strain on future cash flow as it creates new ongoing expenses (i.e. the expense of paying the credit card back, plus the interest),’ Ms. Clothier says.
Another way is that they may try to ignore the expense or try the ostrich approach of burying their heads in the sand, hoping it might go away.
If you know you’re going to have problems paying unexpected expenses, the sooner you can speak to the creditor, the better.
There are often options, including payment plans, etc., that can be arranged if we are upfront and willing to work with them to find a solution within our budget.
How to stop unexpected expenses derailing us in the future
‘Having a plan or strategy to manage unexpected or emergency expenses can significantly reduce your financial stress,’ says Ms. Clothier.
It can also support you to stick to a budget, save and build wealth for the future. Failing to have a safety net or plan can be very stressful if you are faced with a surprise or unplanned financial obligation
Being able to develop and maintain a cash reserve is a great way to manage.
This is all about planning.
Once we start to pay much better attention to our finances, we plan ahead naturally and learn to put money aside if it is possible.
We also realise there are even ways to put money aside for things like fire, flood, or health emergencies – by taking out insurances to protect against these expenses
It’s a valuable exercise to make a list of all of the so-called unexpected expenses you’ve experienced. It might look something like this:
- Medical expenses;
- Doctor/Dentist bills;
- Unplanned school fees;
- Kid’s expenses such as sports, activities, trips, and other expenses;
- Vet bills or animal care;
- Membership Renewals / Subscriptions;
- Car Maintenance, Registration;
- Home maintenance and repairs;
- Gifts for celebrations, birthdays + parties;
- Talk of interest rates going up; and
- A family member starting to become unwell.
‘There are also likely to be other predictable expenses that you can add to your list that are more specific to you,’ Ms. Clothier says.
How many of these could not have been predicted?
Estimate the cost of these expenses. Estimating the costs of upcoming expenses will help you make a plan for managing them.
Review your bank and credit card statements to see what irregular expenses pop up, or research what the cost might be if you were to face these expenses in the future.
Build these expenses into your budget or spending plan.
When you go to do next month’s budget or spending plan, review this list of items to see how and where you can incorporate irregular expenses into your budget.
These steps shift your focus to planning for these unexpected expenses instead of being surprised by them.
- Don’t borrow to pay off an unexpected expense.
- Don’t bury your head in the sand.
- Talk to the person or organisation you owe money to – asap.
- Are your unexpected expenses just unplanned costs?
- Develop a plan for unexpected expenses.
- List all possible future/irregular expenses.
- Build these costs into your budget.
- Consider whether insurances may be necessary.