Unexpected Expenses Derail The Debt Reduction Train

Posted by The Happy Rock on June 26, 2008

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Not much can kill your debt reduction momentum like a $500 dollar expense that you haven’t planned for. Without some savings set aside we often are forced to go into debt to pay of the bill and that destroys the plan and demoralizes our already fragile money psyche.

When just starting out on your debt reduction journey it is quite easy to budget and plan for your normal monthly bills like credit card payments, rent/mortgage, utilities, etc, but the type of expenses that derail the train are not the monthly expenses. There are the irregular bills, the ones due every six month or a year and the ones that you can’t predict ahead of time. Some examples of expenses that often get overlooked are:

Car insurance
Auto repairs/home repairs
New purchases like a needed couch or lawnmower
Vacations
Taxes
Christmas spending
Birthday, graduation, and wedding type presents
Anything else that pops up without warning. Feel free to add to the list in the comments.

Now what that you have some idea that these things are coming, what do you do next. First, realize that even experienced budgeters and planners are going to forget things. This means that you must plan for unexpected expenses. This is exactly why the emergency fund was invented. For those that don’t know, often the first step in a good debt reduction plan is to save $500, $1000, $2000 or more depending on your risk of unexpected expenses. For most $1000 is a nice amount. So before you pay any significant amount on your debt, keep paying the minimum payments and shove the extra money into a savings or money market account that is not so easy to get to that you will spend it. Having just that little buffer really helps inspire some confidence that you can succeed and that you can handle most of the unexpected situations that WILL come your way.

Starting an emergency fund isn’t the only thing you should do. Next you should sit down and list any irregular or unexpected expenses that you might have(use the list above as a starting point). Once they are on paper they aren’t unexpected and you can plan for them. The $1200 auto insurance bill due in October requires that you save $300 a month(x 4 months) in order to not go into debt when it comes time to pay. Yes that also means setting a Christmas spending budget now and saving for it, so you can avoid the Christmas credit card hangover and regret. Continue the process with the rest of the list, and then use the rest of your income each month to pay on your highest priority debt. If you don’t feel like you have enough money after you plan for all your upcoming expenses, then you need to revisit different ways to cut some of those costs.

» Filed Under Debt Elimination, Financial Succes, Psychology of Debt

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Comments

10 Responses to “Unexpected Expenses Derail The Debt Reduction Train”

John (3 comments.) on June 27th, 2008 9:15 am

If you are in debt reduction mode you don’t get to take a vacation at all. You pay down your debt then build up savings then you can think about taking a vacation. If you are planning a vacation while still steeped in debt then you are not serious about debt reduction.
The Happy Rock (268 comments.) on June 27th, 2008 9:24 am

@John - I tend to agree personally, but there is the personal side to personal finance. Some people have lower incomes or really high debt which might drag out the reduction for multiple years. Some people might not be as ferocious as others or they might feel a vacation is a nice little reward after a milestone is met. The point is that if you decide a vacation(small or large) fits into the plan, then plan for it and pay cash. Change your behavior and you will win. We did a few vacations while we were in debt reduction mode, but it took us about 4 years to get out of debt. Maybe we could have done it in 3 1/2 if we hadn’t, but who know if we wouldn’t have gotten burned out.
Will (4 comments.) on June 27th, 2008 6:23 pm

I think that budgetting in fun rewards is a very large and important part of the reduction process. If you live in a cave and don’t do anything fun you will reduce your debt faster but are probably much more likely to give up. If you are smart and change your habits then there is no reason you can’t have a budgeted movie, dinner out, or yes even a vacation.
NtJS (3 comments.) on June 30th, 2008 1:30 pm

Wow! That brings back memories…. “oh yeah, property taxes…” Those irregular bills will really screw your budget up. Our trash company used to bill quarterly. Quarterly! They probably saved a ton over monthly billing, but seriously!

As you note, the best thing you can do is save monthly for them, but FIRST get that baby emergency fund going because you will need it.
Tiffanie (9 comments.) on July 3rd, 2008 10:13 pm

You bring about such a good point! I get a discount if I pay my car insurance in 6 month increments rather than monthly, so I save $160/month so that when it’s time to renew (October and April), I have the money! In the meantime I have it sitting in my HSBC savings account online earning 3.5% interest The same goes for my “auto maintenance fund”. I need to set aside a vacation fund, gift fund, and christmas fund, though.
ubonline (1 comments.) on July 4th, 2008 8:30 pm

Yep, the dreaded car repair bill. Always happens at the wrong time. If you can set up a car repair savings account, good for you. Most people struggling with debt can’t do it.
tiffanie (9 comments.) on July 7th, 2008 1:45 pm

@ubonline: i only set aside $50/month for the auto maintenance fund, and since we have a newer car (2006 Pontiac G6 GTP), I have never had to dip into it. I will, however, be using it for license renewals this year and probably oil changes, where I hadn’t been in the past.
Drew "The Solution" (4 comments.) on July 10th, 2008 8:45 pm

You hit the nail on the head!

People make budgets, but they always seem to forget birthdays in their budgeting equations and birthdays can be expensive.

Most of us have 4-5 birthdays each year that we have to cough up a pretty decent present for, but then there is also friends and acquaintances that we have to fork out for.

Throw in a wedding invite and a few kids birthday parties if you have children and it can add up….and up..and UP.

Money needs to be set aside for these things, of course it all depends on how much you spend on presents, but you’ll be lucky to spend less than $1000 per year.