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
- 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.