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Unexpected Expenses Derail The Debt Reduction Train

by The Happy Rock on June 26, 2008

derail-train.jpgNot 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:

  1. Car insurance
  2. Auto repairs/home repairs
  3. New purchases like a needed couch or lawnmower
  4. Vacations
  5. Taxes
  6. Christmas spending
  7. Birthday, graduation, and wedding type presents
  8. 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.

{ 10 comments… read them below or add one }

John June 27, 2008 at 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.

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The Happy Rock June 27, 2008 at 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.

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Will June 27, 2008 at 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.

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NtJS June 30, 2008 at 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.

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Tiffanie July 3, 2008 at 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.

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ubonline July 4, 2008 at 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.

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tiffanie July 7, 2008 at 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.

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Drew "The Solution" July 10, 2008 at 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.

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Buddy February 28, 2009 at 6:10 pm

It seems that no matter how much you plan and save you can’t predict future occurrences. You can put money aside for your car insurance, your birthdays, Christmas, and all the holidays that go along with it, but in todays economy in truth we don’t even know that we will have a job the next day. Me for example, I just recently bought a house and was cruising along making all of my payments on time and paying the rest of my bills faithfully. The next instant I get laid off over the Christmas period. Then I have to go in for a hernia surgery. Needless to say right now I am going into a debt settlement and looking to do a loan remodification for my home. Good credit one minute and the next in a matter of a few months it is shot.

I am grateful for the programs that are available to help people get out of debt and the counseling programs that go along with them. This is far better than the debtors prisons from the old days. So on the these points about budgeting and saving for unplanned events I agree whole heartedly. It is not always easy though. But my advice if you are able. Put a little more than what is necessary to meet your desired goal aside for those “extra” unexpected events. It could save your credit and your nerves.

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Annie @ Credit Dispute July 15, 2009 at 10:27 pm

If you really want to reduce your debt, there is no better way than by tracking every single penny you spend and sticking to a realistic budget. By budgeting, you can easily find where your extra money is going and oftentimes, realize how you can save hundreds of dollars that can apply directly to your debts.

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