From car repairs and home appliance breakdowns to accidents or a sudden disability, unexpected events can happen to anyone at any time. Planning for these scenarios can help you better manage your finances and allow you to focus on what matters most. It’ll also give you greater clarity about how much to save in an emergency fund, or which types of insurance coverage can help protect you when times get tough.
Difference between a financial emergency and nonemergency
Understanding the difference between a financial emergency and a nonemergency is crucial for making sound spending decisions and prioritizing unexpected expenses. A financial emergency is an unforeseen expense that can have severe consequences on your health, income, housing, or overall well-being if not addressed immediately.
On the other hand, a nonemergency expense is discretionary and doesn't require immediate action. For example, replacing a dishwasher that breaks down suddenly may be an unexpected expense, but it’s not one that requires immediate action.
It’s important to address genuine emergencies promptly, while you should evaluate the significance of nonemergency expenses within your budget before allocating funds to them.
Common examples of unexpected expenses
1. Medical emergencies
A major medical or dental emergency can have a significant impact on your finances. Even with health insurance, costs can add up. Consider that fixing a broken leg can cost up to $7,500 and the average cost of a 3-day hospital stay is around $30,000.1
How to help plan for unexpected medical expenses:
Supplemental health insurance can help alleviate some of the financial burdens of an unexpected hospital trip, treatment, or surgery. It’s worth considering options — such as hospital indemnity, critical illness, or accident insurance coverage — which may be available through your workplace.
These plans offer payments that you can use as you see fit for medical and non-medical expenses — including hospital bills, prescription medications, transportation costs, and even everyday living expenses.
2. Emergency vet care
Pets can experience a sudden illness or accident that may require immediate medical attention. Emergency vet care can range from a few hundred dollars to several thousand dollars, depending on the specific nature and severity of the emergency.2
How to help plan for unexpected vet expenses:
Consider pet insurance. A pet insurance policy can help offset veterinary costs, including emergency care, surgeries, and medications.
3. A sudden passing
The sudden passing of a loved one is a difficult and emotional time that can also bring unexpected financial challenges. For instance, you may need to book last-minute travel arrangements or cover funeral costs. You may also need to work with an attorney to settle the deceased’s estate, which can include fees like attorney fees, probate costs, and executor fees.
How to help plan for an unexpected passing:
Legal insurance can help you feel more prepared for legal costs. It offers access to a network of attorneys that can help you navigate legal fees and other estate planning expenses. Having life insurance can also help alleviate some of the financial burden that comes with a sudden loss. Life insurance provides a lump-sum payment upon the insured person’s passing, which can help cover funeral arrangement costs and outstanding bills, and provide financial support to dependents.
4. Disabilities that prevent you from working
An unexpected disability can prevent you from working and earning an income, making it difficult to cover daily living expenses, medical costs, and other financial obligations. Consider that a physical disability like paralysis or chronic pain might impact your ability to perform physical tasks at work. Or a neurological disorder, like Parkinson’s disease or epilepsy, could impair your cognitive abilities or motor skills.
How to plan for an unexpected disability:
Disability insurance provides financial protection by replacing a portion of your income if you become disabled due to an illness or injury. It pays out a monthly benefit that you can use to cover essential expenses such as mortgage payments, groceries, and utilities. In addition, you may want to consider building an emergency fund that can cover at least three to six months’ worth of living expenses. This can act as a financial safety net during periods of income loss.
5. Natural disasters
You never know when a natural disaster — such as hurricanes, earthquakes, wildfires, or floods — will impact you. These types of events can cause significant damage to homes, cars, and other property.
How to help plan for unexpected natural disaster expenses:
Saving and budgeting for natural disasters can help ensure you’ll have cash on hand to pay for needs like gas, groceries, emergency supplies, or temporary shelter. You may also want to review and update your renters, vehicle, or homeowners insurance policies to make sure you have the proper coverage to protect yourself in the wake of a natural disaster.
6. Car and home repairs
Over time, your car and home will experience natural wear and tear, requiring periodic repair and maintenance. And accidents — such as vehicle collisions or a burst pipe — can happen unexpectedly and cause significant damage to property.
How to plan for unexpected property expenses:
To better manage the financial impact of an unexpected car or home repair, stay proactive with regular maintenance. Also, try to anticipate and budget for future expenses that may arise down the line. This can help prevent larger problems with your car or home and save you from expensive repair costs.
In addition to having adequate insurance coverage, you may also want to consider purchasing a home warranty or service contract. These plans can cover repair or replacement costs for major home systems and appliances.
7. Rent or bill increases
Your landlord may increase the rent when your lease is up for renewal. Utility companies or service providers may raise their monthly rates. Similarly, your insurance policies can experience periodic premium increases. All of these scenarios can result in higher monthly or annual expenses that you may not have been prepared for.
How to plan for unexpected bill increases:
Maintaining and contributing to a savings account is one way to help alleviate financial strain when your bills suddenly increase. Choose a reasonable amount to set aside each paycheck, and set up automatic transfers from your checking account to your savings account. By consistently saving a portion of your income for unexpected expenses, such as bill increases, you're building a financial buffer to help cover costs.
Tips to help you prepare for unexpected expenses
Here are some ways to minimize the financial impact of an unexpected expense.
- Review your insurance policies: Periodically review and update your health, home, auto, and other relevant insurance policies. Make necessary adjustments as your circumstances change and ensure you have adequate coverage for any potential risks.
- Consider additional insurance coverage: By obtaining additional insurance, such as pet insurance or supplemental health insurance, you can safeguard against expenses that may not be fully covered by your existing policies. Taking this proactive measure might reduce the burden of out-of-pocket expenses associated with an unexpected event.
- Build an emergency fund: Having a cash reserve specifically earmarked for unexpected expenses can help alleviate financial stress when you’re faced with an emergency or unforeseen event. Aim to save three to six months’ worth of basic living expenses.3 Try regularly setting aside a small portion of your income and gradually increasing the amount over time.
- Stick to a budget: Create and maintain a budget that outlines your savings goals, as well as your income and expenses. Be diligent about tracking your spending and finding ways to save. Consider cutting back on certain areas and allocating more funds to saving for unexpected events.
- Reduce and manage your debt: Effectively managing and reducing your credit card and loan debt can help free up funds to handle unexpected expenses. Create a repayment plan to minimize high-interest debt and help you pay off balances.
- Diversify your income streams: Having multiple sources of income can provide greater financial flexibility to deal with the unexpected. Explore passive income streams — such as property rentals or stock investments — or try getting a side hustle to supplement your income.