Liz Weston: Predict ‘surprise’ bills, no crystal ball needed
It doesn't take much to upend many Americans' finances. A car that won't start, a furnace that dies or a trip to the hospital can leave households struggling to make ends meet.
According to the
Yet it is hardly a shock if an appliance wears out or a car breaks down.
It's time to rethink what we mean by unexpected expenses. Some bills may be unpredictable in their amount or their timing, but they're still inevitable. In other words: If you have a car, or a home, or a body, sooner or later it's going to cost you.
A better approach, especially for households currently living paycheck to paycheck, is to save for the most likely costs and have some kind of Plan B to handle the truly unexpected.
Here's how that might work with three of the most common unexpected expenses Pew found:
—Repairing or replacing a car (experienced by 1 out of 3 households that faced a financial shock)
—A major home repair (experienced by 1 out of 5)
—An injury or illness that results in a trip to a hospital (also experienced by 1 out of 5)
CAR REPAIRS
Tuck aside
As a Plan B, keep space available on a credit card or consider a personal loan if repair costs outstrip your savings. For homeowners, a home equity line of credit may be a lower-cost option.
HOME MAINTENANCE AND REPAIRS
Maintaining your home can reduce, but not eliminate, the cost and frequency of repairs. Typical monthly maintenance costs vary from a low of
That's true for repairs as well, although how much you spend depends on what breaks and how badly. The usual rule of thumb is to set aside 1 percent of your home's purchase price each year for repairs. Some years you'll have money left over, but eventually you'll face a cost like a new roof that overwhelms your savings. When that's the case, that home equity line of credit can be a low-cost way to pick up the slack.
MEDICAL BILLS
If you think health care costs are predictable, you've never faced a surprise bill from an out-of-network anesthesiologist at an in-network hospital — or any of the other ways that medical pricing defies sense and logic.
Ideally people would save enough to cover their annual deductibles, but that can total thousands of dollars. (The average deductible under a "silver" Obamacare plan is
Save what you can, but your Plan B shouldn't involve credit. Most medical providers offer interest-free payment plans, and many also have some kind of discount for struggling families. They may not offer unless you ask, and they almost certainly won't if you whip out a credit card.
ISN'T THIS JUST AN EMERGENCY FUND?
The unexpected wouldn't present such a big problem if we all followed financial planners' advice to stow at least three months' worth of expenses in an emergency fund . The average household spends
That's a good goal, but the most important thing is to tuck away something — anything — every paycheck. The best way to deal with the unpredictable is to predictably set aside money every month. Make savings an automatic habit, and you'll be better able to cope with whatever surprises life offers.
This column was provided to The Associated Press by the personal finance website
RELATED LINKS:
https://nerd.me/emergency-fund
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