Pre­dict ‘sur­prise’ bills, no crys­tal ball needed

Daily Local News (West Chester, PA) - - BUSINESS - Liz We­ston is a columnist at NerdWal­let, a cer­ti­fied fi­nan­cial plan­ner and au­thor of “Your Credit Score.” Email: lwe­ston@ nerdwal­let.com. Twit­ter: @ lizwe­ston.

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 Fed­eral Re­serve, 44 per­cent of U.S. adults say they would have trou­ble com­ing up with $400 to cover an un­ex­pected ex­pense. Even fam­i­lies who have more in the bank can floun­der. Sur­veys by The Pew Char­i­ta­ble Trusts found that 51 per­cent of fam­i­lies with at least $2,000 in sav­ings re­ported trou­ble pay­ing the bills af­ter a fi­nan­cial shock.

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

U.S. house­holds spent an av­er­age $837 on ve­hi­cle main­te­nance and re­pairs in 2015, ac­cord­ing to the U.S. Bureau of La­bor Sta­tis­tics. Most spent be­tween 1.4 per­cent and 1.8 per­cent of their in­comes on th­ese costs.

Tuck aside $500 to $1,000 to cover a typ­i­cal re­pair, and add to that cache as you can. Once you pay off your cur­rent car, re­di­rect the pay­ments into your re­pair fund. You can use any money you don’t spend on re­pairs as a down pay­ment on your next car.

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 $25 a month in Phoenix to a high of $83 in Bos­ton, ac­cord­ing to an Angie’s List anal­y­sis of Cen­sus Bureau fig­ures. Gen­er­ally, the harsher an area’s weather and the higher its la­bor costs, the more home­own­ers pay for pre­ven­tive care.

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.

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.

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 $3,609 this year, and it’s $6,105 for a bronze plan, ac­cord­ing to the Kaiser Fam­ily Foun­da­tion.)

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 $4,688 each month, ac­cord­ing to the Bureau of La­bor Sta­tis­tics, so such a fund would to­tal about $14,000.

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.

Liz We­ston

Nerd Wal­let

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