How to handle an unexpected expense while building good financial health
Paid for by Discover® Personal Loans:
The past two years were a lesson in unpredictability. Unexpected medical bills, childcare expenses and job changes led to many people feeling uncertain about their finances. According to a Discover survey*, 58% of respondents have taken steps to address an unexpected expense since the beginning of the COVID-19 pandemic.
When these unexpected expenses happen, it can be easy to turn to short-term solutions — solutions that might have long term effects on your bank account. “If your financial situation suddenly changes, or feels out of control in some way, it’s tempting to rely more heavily on your credit cards or to skip a payment,” says Matt Lattman, vice president of Discover Personal Loans. “That can be especially true if you think it’s a short-term setback. But putting bills on credit cards can lead to high balances and the accumulation of higher-interest debt.”
Lattman explains that if you can’t afford to pay more than the minimum payment on that balance each month, your debt may continue to grow. “The more it grows, the tougher it may be to pay it down. This can affect your credit health, because lenders look at how much you owe in relation to how much you earn as one part of your credit health. And it can cause real anxiety when you think about your financial goals.”
Luckily, there are alternate paths to cover an unexpected expense that can also help you to stay on track for your future goals. Here are some possible ways to limit the impact of financial surprises.
See if you have “found” money in your current budget
Before you consider borrowing, it can be helpful to see if there are ways to adjust your current budget and find extra money. This may include both cutting back on expenses and looking for opportunities to earn extra money. Start by looking at what you spend and what you earn. Next, look for where you might be able to trim expenses, like reducing the amount of times you go out to eat, canceling unused subscriptions or memberships and renegotiating things like your cellular or cable service, Lattman suggests.
Another way to potentially trim expenses: Assess how much money you’re paying in interest on current loans. Consolidating your debt into a loan with a lower interest rate can help you save money, Lattman explains. “Do you have several credit cards on which you carry a balance, for example, or a store card you used for a big purchase with a promotional interest rate coming to an end? By consolidating your higher-interest loans into a personal loan, you may save hundreds, even thousands, of dollars in interest,” he says. “Plus, you’ll get a set regular monthly payment you can more easily budget for.”
Assess your loan options
When you receive an unexpected bill, it can be tempting to pay by any means necessary, including pulling out your credit card and planning to deal with the expense later. But there may be alternate options.
For example, if it’s a dental bill not covered by your insurance, is it possible to set up a payment plan with your dentist? Sometimes, asking your provider about alternate payment options will provide you with additional choices. They may offer an extended payment plan or offer discounted financing options. As with any loan, assessing the interest rate and other terms of the loan is one factor to consider. Some people also may turn to friends and family to help them during a financial rough spot.
You could also consider taking out a personal loan. Unlike putting an expense on a credit card, applying for a personal loan gives you a lump sum of cash that you can then use to cover any expense that popped up. Personal loans generally have fixed interest rates, which means that the interest rate is locked for the duration of the loan. And, as Lattman points out, unlike a credit card, you’ll be paying a fixed monthly payment each month. “The fixed interest rates offered by many personal loans bring predictability to your situation,” he says. “You will also be able to circle the date on the calendar of your final payment.”
Whatever option you choose, weighing the pros and cons, including the overall cost of each option, can help you decide which one makes the most sense for you.
Plan in advance
It’s also important to plan for the unexpected, and Lattman points out that financial stress is exacerbated in an emergency. “Money is stressful, and when your water heater breaks or your car needs repairs, if you don’t have savings to cover it, you might look for easy solutions that are harmful in the long run. The best thing you can do is plan in advance. Look at your expenses to know what you pay for necessities like housing, food, utilities, transportation and clothing. Figure out if you can trim discretionary spending like eating out or subscription services.”
Once you’ve identified opportunities to reduce discretionary spending, then the next step is to set aside that money in savings. “It can be helpful to automate your savings so that the money goes directly to a special account that you can earmark for an emergency fund, aiming to save for three to six months of emergency expenses,” Lattman says. “Worst-case scenario: You’ll be able to handle an emergency. Best-case scenario: You won’t have to.”
From Discover Personal Loans:
You can save hundreds, or even thousands, of dollars on interest when you pay off higher-rate debt with a Discover personal loan. To estimate your savings, check out Discover’s debt consolidation calculator and input your outstanding amounts. Discover does not charge any origination fees and offers flexible repayment terms so you can choose the option that works best for you. Learn more about how Discover Personal Loans can help you reach your financial goals.
Discover makes loans without regard to race, color, religion, national origin, sex, disability or familial status.
*About the survey: A national survey of 1,515 U.S. residents ages 18 and up was commissioned by Discover and conducted by Dynata (formerly Research Now/SSI), an independent survey research firm, between September 23 and September 27, 2021. The maximum margin of sampling error was +/-3 percentage points with a 95 percent level of confidence. Generations are defined as: Generation Z, born after 1997; millennials, born between 1981 and 1996; Generation X, born between 1965 and 1980; and Baby Boomers+, born before 1964.
This article was paid for by Discover Personal Loans and created by Yahoo Creative Studios. The Yahoo Finance editorial staff did not participate in the creation of this content.