Oct 17, 2024
Sooner or later, most of us will face a major, unexpected expense that can put our finances in turmoil. Examples of a difficult, unexpected expense are a major home or car repair, or a big bill for a medical or dental procedure. A pet emergency, a death in the family, or relocation can also lead to thousands of dollars in expenses that need to be paid fast.
For many people, events like these can cause stress and budget problems that last for months or even years. In fact, in 2023, 37% of adults in the U.S. reported they could not be able to cover an unexpected expense of $400 or more with cash, savings, or a credit card, according to a report from the Federal Reserve.
If a costly emergency strikes and you don’t have an adequate emergency fund, the key is to be proactive.
Here are some tips to help you deal with unexpected expenses and be better prepared for next time.
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Depending on your creditor, you may be able to work out a payment plan to handle the debt, rather than struggling to pay the bill all at once.
Explain your situation and see if it’s possible to work out a payment arrangement that’s more manageable. Some creditors may be willing to extend the due date for your bill, or spread payments over several months until you’re paid in full.
Hospitals and other healthcare providers are often willing to handle patient bills this way. Similarly, businesses that provide major home repairs, such as a new roof or HVAC system replacement, may offer a reasonable payment plan so you can get the work done even if you can’t pay the entire amount at once.
Family members or friends may be willing to help you pay for a major unexpected expense, if they have resources available. Before you ask, think through how borrowing from them could affect your relationship. If you ask for assistance and they agree, iron out the details to establish clear terms for any loan, including any interest charges and the repayment period.
Some employers offer employee benefits to help you pay for emergency expenses. For example, you may be able to take a salary advance, which allows you to borrow from yourself. Then, through such a program, you would repay the borrowed amount through payroll deductions from future paychecks. You may also be able to borrow from a permanent life insurance policy or 401(k) account. Just be sure you have a clear understanding of the terms and conditions if you choose this route.
A credit card could also be useful to cover emergency expenses, if your credit limit is high enough. Ideally, you’d look for a new card with a 0% or low interest rate offer, or a balance transfer offer, with the goal of paying off the balance during the introductory offer period. A cautionary note: A credit card may not be the best solution if it has a high interest rate or you can’t pay the balance during the introductory rate period.
If you choose to use a credit card to fund an unexpected expense, make sure to look at all your options to find the one that fits you best. Using the right card responsibly can help bring down your debt but using one with a high interest rate or in a way that might overextend yourself could be counterproductive.
A personal loan is a fixed-rate loan that is unsecured, meaning you don’t need to put up collateral to get one. With a Discover® personal loan, you can borrow from $2,500 to $40,000. When you need quick access to funds to cover a large unplanned expense, a personal loan could be a good solution. With some lenders, such as Discover Personal Loans, money can be sent as soon as the next business day once you’re approved and accept the loan. And a personal loan offers flexibility: You choose where the money goes. You can send money straight to many creditors or to your bank account.
Another benefit of a personal loan with a fixed rate is that the interest rate and your monthly payment never change. There’s typically a set payoff date, and you know the total amount owed from the beginning of the loan. Your interest rate on a personal loan could also be lower than what you’d pay with a high-interest credit card, making it a potentially better option to pay for emergency expenses.
Additionally, it might be helpful to use some of the funds you get from a personal loan to consolidate higher-rate debt you already carry. This means you would take out a loan amount that covers both the emergency expenses and any outstanding bills and balances that have a higher interest rate. A personal loan can help you pay off debt sooner and save on interest when consolidating higher-rate debt. In fact, 93% of debt consolidators said they saved money and time by taking out a Discover personal loan.*
If you go the personal loan route, consider key factors before choosing a lender. Make sure you understand the total cost of the loan, including all fees. Your best option is to find a lender, like Discover Personal Loans, that doesn’t charge application fees, origination fees, or prepayment penalties.
It might also help to look closely at your monthly spending habits: Start by prioritizing the bills that are non-negotiable, and then consider other spending to determine where you can cut back. Maybe you can suspend gym memberships or other subscriptions or decide to eat more meals at home until your unexpected expense is paid off.
When you look around your home, do you see items of value you can live without? Clothing, jewelry, handbags, antiques, electronics, or even unused gift cards can all be sold to generate cash quickly. Look for reputable online marketplaces or roll up your sleeves and have an old-fashioned garage sale.
What about your car? If walking, ride sharing, or public transit are viable options where you live, you might explore selling your vehicle, if you own it. It may seem like a big move, but this short-term sacrifice could bring a check that’s big enough to pay for that major expense, and you’ll learn whether you really need the vehicle. If you can eliminate a car, you you'll also avoid paying operating costs and insurance premiums; that money can go toward your big emergency expense.
When confronted with a serious gap in your finances, it’s time to get resourceful. You may be able to pick up an extra shift at your current job or land a second job to bring in additional income.
For example, seasonal work over the holidays or during a busy tourist season doesn’t require advanced qualifications, and employers don’t expect a long-term commitment. While working two jobs can be demanding, it may help you see light at the end of your financial tunnel.
Another option is to start a side hustle. Maybe you have a creative passion outside of your day job, like photography, art, or other “maker” pursuits, and you could sell your creations online or at local events.
Other popular opportunities for additional income include driving for a ride-share company or becoming a vacation rental host. Or you could keep it simple: cut grass, walk dogs, or take care of pets and homes for people when they’re out of town.
Expensive emergencies can deal a serious blow to your finances. Although you can’t anticipate the details of such an event, you can take steps to be better prepared if one does arise. To ensure that an emergency expense is a setback and not a full-blown financial crisis, start by creating an emergency fund if you don’t already have one.
Most financial experts recommend a target of 3-6 months of living expenses to ride out a financial emergency, but you can start with a smaller goal: Even $1,000 can make a dent in a big bill.
Next, create a budget that factors in your emergency fund, as well as periodic, expected maintenance for your car and home. List annual bills, like property taxes, and other known expenses, such as car insurance. Use a budget strategy that fits your personal circumstances. One that’s helpful to many people is the 50-30-20 rule.—that is, divide up your after-tax income into three categories: 50% for needs, 30% for wants, and 20% for savings.
And finally, continue to live within a budget, even as your income increases. This sets the groundwork to grow savings and prepares you to make necessary changes if you’re hit with a financial emergency.
When the unexpected happens, you want to be in a position to tackle the situation immediately. Assess your financial picture, then figure out the quickest and easiest way to pay for the expense.
Once you’ve determined how to pay the bill, come up with a budget and an action plan to identify the expenses that could be preventing you from saving more money, to help you in the event of another major surprise expense. It will take work and discipline, but you’ll gain peace of mind and confidence that you can handle the unexpected.
Want to learn how to manage your money better? See five ways how.
The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.
*ABOUT SURVEY
All figures are from an online customer survey conducted September 14 to October 3, 2023. A total of 1,191 Discover personal loan customers were interviewed about their most recent Discover personal loan with 550 of them using the funds to consolidate debt. All results @ a 95% confidence level. Respondents opened their personal loan between January and July 2023 for the purpose of consolidating debt. Agree includes respondents who ‘Somewhat Agree’ and ‘Strongly Agree’.
