Major expenses are often unexpected. Medical expenses come with a lot of stress of worrying about health issues, car repairs may mean a disruption to your daily life, and home renovations — although exciting — also could be inconvenient if you didn’t plan for them.
That is why you should have a plan for what you will do to tackle unexpected major expenses before they happen. If you don’t do so, your first choice could be to reach out for your credit card, which is an expensive way to pay for a major expense.
Planning ahead may seem unnecessary, but if you’re being realistic, you should expect that something is likely to come your way. So instead of hoping to avoid any major expense in the near future, take the follow steps.
Buy insurance
Health insurance, auto insurance, homeowners insurance are just a few types of insurance that can help you avoid major expenses — or at least limit your responsibility to an amount that is manageable. How much insurance you should buy depends one what your have and your lifestyle.
Don’t go overboard to buy everything from jewellery insurance to pet insurance — and everything in between. Keep your spending on what matters most and make sure your insurance is worth the money. In many situations, adding coverage or increasing coverage limits doesn’t cost much, but make a big difference when you need it. In addition, make sure that your insurance provider has a good reputation in terms of cooperating when claims are made.
Build an emergency fund
Even if you don’t make much and think that putting money aside is an unrealistic idea, building an emergency fund is a must. Setting money aside every month to build your emergency fund should be treated just like paying bills. If you have income, you should be able to tighten the belt, even if that is not comfortable, to make sure that you have some cash accessible to you immediately in case of an emergency.
Resist the urge of dipping into your emergency fund once it begins to grow. This fund should be your resort in case you lose your job or have to pay for a big medical expense, etc. So the larger amount that you have — as much as six-month worth of income — the better
Once you have this emergency fund build, you can consider saving or investing in other long-term vehicles.
Know your loan options
If don’t have savings or unable to save a sufficient cushion, know your loan options. Will you or your spouse or other family member be able to acquire a personal loan quickly, if needed? How is your credit history? Is your employment a big factor? Knowing your eligibility and what is required for you to get access to cash quick should help you get some peace of mind and know what to do when a crisis hits.
Although a personal loan is still debt, it should be at a lower rate and better terms than using a credit card. It also should leave you your credit cards available to use for usual spending, where you’re able to pay them down as usual.
While you’re looking at your loan options, consider special financing for your purpose. For example, if you’re renovating your home, you may be able to get a home-equity loan that is at more favourable terms and rate than a personal loan.
Some medical providers may allow you to finance large expense at no interest. So explore your options before you rush to your credit card. Remember, debt doesn’t all come at the same price, and when you’re financing a large amount, your choice can make a big difference in how much you end up paying.
The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.
Factbox: Be prepared for major expenses
Have an emergency fund
Buy insurance for important stuff
Know your loan eligibility
Don’t resort to credit cards unless you have to
— R.O.
