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People often cite unexpected expenses as one of the main reasons they began using their credit cards at the beginning of a debt cycle. It's not their regular monthly expenses – like insurance or rent – that get them into trouble. Instead, it's their reliance on credit to pay for everything over and above basic living expenses – like a flat tire, a trip to the vet or an emergency flight to visit an ailing family member.
Some common stories I've heard over the years may help to illustrate:
Dana the Proud Mother
Dana had been doing well. She consistently kept up with her bills and made sure she paid off her credit card at the end of every month. Then the transmission went in her car. She didn't have money for the repair, so she charged it to her credit card – fully expecting to pay it off within a couple of months.
But before that could happen, she found out her daughter was getting married. While her daughter paid for most of the ceremony herself, there were a couple of unplanned costs for the reception. Those also went on Dana's credit card.
Now she's using her credit card for
nearly all her expenses because her monthly interest charges are taking up more of Dana's income than she can afford.
Steve the Renovator
Steve and his wife purchased a new house a few years back. There were several cosmetic changes they wanted to make before they moved in – which they charged to their line of credit. They reasoned the debt was low-interest and they could have it paid off within a couple of years.
Less than a year later, they learned their roof was leaking and would need replacing. Several months after that, their furnace let go – right in the middle of winter. Those immediate and necessary repairs also went on their line of credit.
Between their new mortgage and a line of credit balance higher than Steve's annual salary, the couple find themselves completely overextended and see no way of paying off their debt before they retire.
A Common Thread
In both cases, my clients told me they were surprised by the costs of maintaining their car and home. In their minds, they didn't have any financial problems until the transmission broke, the roof started leaking or the furnace stopped working. But that's not quite accurate.
When I talk to my clients about money management, this is one of the areas I focus on at length: there is a significant difference between a truly 'unexpected expense' and one that simply isn't part of the plan (but should be).
Expect the Unexpected
In every aspect of your life, there will invariably be additional expenses over and above the regular monthly expenses you plan for in your budget. It doesn't matter if you're a homeowner, a car owner, a parent or student. This is true for everyone. It's not the expenses themselves that are unexpected. Merely their timing.
You can choose to be reactive like Dana and Steve. Or you can choose to be proactive and have a plan and contingency fund in place for when these things inevitably occur.
Re-Thinking Your Budget
The best approach to planning for unexpected expenses is to treat every budget cycle like this is the time you're bound to face one. Create a separate line item in your budget and label it 'rainy day fund', 'slush fund' or simply 'unexpected expenses'. Designate a certain
inflexible portion of your income toward this category, just like you would for your mortgage or rent. It's often helpful to have a dedicated high-interest or tax-free savings account to store and grow this money.
Now, when something comes up that you didn't plan for and cannot avoid, you can use this money to cover the costs, rather than credit.
Reverse Engineer Your Unplanned Costs
Knowing how much to contribute to your emergency fund each month is not an exact science. However, your expenses from last year will offer some insight.
For example, let's say you spent $1,200 on automotive maintenance. It's reasonable to assume you'll probably require
at least that much this year as well. That means you'll need to budget a minimum of $100 per month for unplanned automotive expenses.
Run these same calculations for your household maintenance costs, healthcare expenses, school, special occasions, clothing and whatever else specific to your home and family life. From there, figure out the maximum you can afford to contribute without sacrificing your regular housing and family expenses.
It may make things seem a little bit tighter initially, but you'll be thanking yourself the next time you're forced to call a tow truck or plumber.
Free Confidential Consultation
If you've found yourself in an inescapable cycle of debt due to one or a string of unplanned expenses, help is available. During a Free Confidential Consultation, a Licensed Insolvency Trustee will review your financial situation and help you find a Life-Changing Debt Solution that works. Whether you'd benefit from personal bankruptcy, a Consumer Proposal, a better budget or another option, they'll help you choose the path to debt freedom that's best for you. You deserve a financial fresh start. MNP can help you get there.
Based out of St. Catharines,
Doug Stuive is a Licensed Insolvency Trustee and Senior Vice-President at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 905.646.6011 or toll-free at 310.DEBT (310.3328).
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