Thirteen Ways To Reduce Financial “Bad Luck”

I have a close relative who is always complaining about how he’s broke because of various elements of bad luck. His car’s broken down, his water heater leaks, he got a speeding ticket – there’s always some reason why he can’t get ahead financially. The problem is that when times are good, he often spends his money in a frivolous fashion.

While it’s fine to spend some money, a bit of careful planning can ensure that “bad luck” comes around less often. Here are thirteen (ooh… unlucky!) tips for reducing the impact of unexpected expenses of all kinds in your life.

13 Tips for Reducing the Effect of “Bad Luck” in Your Financial Life

1. Build an emergency fund

This is the best thing you can do. Each week, deposit a little bit of money into a savings account that you designate as an emergency fund. Then, when a disaster strikes, you can calmly pull the money from your emergency fund and take care of the disaster. How much should you have? Many people offer a “cap,” but I generally believe that it’s a good idea to put that small amount in weekly forever – if you ever get “too much” in the account, then pull out some for other purposes.

2. Make your investments diverse

Don’t make the mistake of putting all of your money in the same investment – or the same types of investments. When you start investing, make sure that your money is in several investments that don’t have significant overlap. For example, you might want to own some domestic stocks, some international stocks, and a few bonds. A great way to diversify yourself is to use broad-based low-cost index funds.

3. Build up multiple streams of income

This can defend you against job loss or other unexpected changes in income. How can you do it? Start a side business. Buy investments that continually earn a reliable income. Produce a one-time item that can earn an income over a long period, like a book or a detailed website. There are lots of possibilities.

4. Back up your data regularly

If you keep financial or other important data on your computer, back the data up regularly. I keep most of my important stuff backed up on two separate 4 GB Flash drives that I keep in the safe – I back data up to this weekly and it’s saved me at least once.

5. Change your passwords on occasion

If you use online accounts significantly, changing your passwords occasionally can protect you against identity theft. I change my passwords every three months. If you’re ever suspicious that anyone may have access to an online account of yours, change the password immediately.

6. Ensure your checking account offers some overdraft protection

Everyone makes little mistakes sometimes, but if you do the math wrong on your checking account, you might just get dinged with a big unexpected fee. Once, with my old checking account, I got dinged with an ATM fee and an account maintenance fee – together, they overdrafted the account and cost me a lot of money. Make sure your checking account offers some form of overdraft protection – I particularly like ING’s overdraft protection on their online checking, which basically covers the overdraft, doesn’t charge you a fee, but charges you a low interest rate on the amount of the overdraft.

7. Get some insurance

If you rent, renters insurance will protect your possessions in the event of a fire. If you own a car, look at car insurance options. If you have a young family, you should definitely look at life insurance. These all reduce your personal risk and, in most cases, are worth it.

8. Don’t speed or blatantly break other traffic laws

Every time you speed, you’re basically taking a chance that there won’t be a police officer with a radar gun to catch you. Remember that each time you drop the pedal to the floor – it could seriously cost you. Besides, speeding is expensive for your gas mileage – most cars are optimized to go the speed limit and they get far worse gas mileage if you speed. Tickets affect insurance too; it’s a lose-lose situation.

9. Keep an updated list of your possessions in a place not inside your living space

This is a very important protection to have in the event of a disaster in your living quarters. List everything of value in your home, along with as many serial numbers as you can find. Be specific with the model numbers, too. This way, if something disastrous does happen, you can use this list with your insurance company to get replacements on the items. Understand the difference between replacement cost and market value.

10. Put a high value on reliability in your purchases – use “total cost of ownership”

Don’t just go for the cheap items when replacing an appliance or an automobile. Instead, do some research and look at the total cost of ownership. For example, quite often the most expensive options end up being the cheapest if you look at energy costs and lifespan into account – if you spend $1,200 on a washing machine, for example, it might use half the energy and have twice the lifespan of the $200 model, meaning that it’s actually cheaper over the lifespan of the machine than the other one – plus, you’re less likely to have an unexpected nasty surprise.

11. Don’t put your money in speculative investments

I get tons of emails about various hot stocks, and I hear lots of “tips” from various people on hot investments. Ignore all of them. Most of those investments are either highly speculative or are set up for you to fail at them. Don’t ever put your money in an investment based solely on one person’s unsolicited recommendation or on one article you read in some investment magazine. Play it safe with your money and it won’t fly away.

12. Make every payment well in advance of the due date

Every bill I have dings me significantly for being even one day late. In order to avoid that unexpected expense, which sometimes happens even if I mail the bill a day or two early, I make sure to get my bills in the mail at least a week before their due date. Don’t let your utility bills ding you with unexpected fees – keep up with your bills.

13. Don’t carry a balance on your credit card

If you can avoid it, don’t put anything on your credit card that you can’t immediately pay off. As soon as you start carrying a balance, you start getting eaten with finance charges, which make it harder to get the debt paid off. When it starts piling up – which it easily can when you start carrying a balance – you’re putting yourself in a dire financial position. If a big unexpected expense comes up, first try to find other ways to pay for it – clean out your media collection, for instance, or sell a few savings bonds. Use your credit card only as a last resort because it will bite back – hard.

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  1. Avlor says:

    I love the fact you posted 13 of them. ;)

    For those of us trying to establish an emergency fund, any time money is taken out – putting it back should be first priority. For example, I just came across a nice little windfall. Hubby wanted me to just go spend it. I want to put it into our emergency savings, which were just demolished by several “bad luck” things that happened in a row. (If you believe in luck.)

    Regarding flash drives for backup. I love them, but Trent is SOOOOO right in having more than one with the data on it. My main one just died on Sunday. I’m buying a new one tomorrow.

  2. Minimum Wage says:

    This all makes a lot of sense, but I can’t build an emergency fund on my low income and high debt load, and I can’t get overdraft protection. I truly live on the economic edge.

  3. Minimum Wage says:

    Things fall apart, the center cannot hold. That’s not bad luck, that’s to be expected. But the timing can be bad luck, as when something prematurely breaks down.

  4. Danny says:

    I like the article, however:

    “most cars are optimized to go the speed limit and they get far worse gas mileage if you speed.”

    So my car is optimized to go 20mph near schools and 45mph on bigger streets and 65mph highway? Um…. NO.

    Also, get a couple external hard drives rather than flash drives. External are far cheaper per gigabyte plus you can store a lot more data.

  5. Trent, while I wholeheartedly agree with having an emergency fund, I have to disagree with “overdraft protection” on the checking account. Most overdraft “protections” today are nothing more than high interest loans from the bank along with associated fees. A much better idea is to keep a “threshhold” minimum amount in the checking account. For my account it is $250. This is in addition to the emergency fund. Why so much? My emergency fund is in a money market account, and checks state on them “not valid for less than $250.”

  6. Minimum Wage says:

    I checked out ING Direct’s overdraft protection and it has no fees and a reasonable interest rate.

  7. Eric says:

    Trent,
    This is great advice. You have a couple of things on here which I think of as low probability, high impact events. Having your identity stolen, getting a major traffic violation, or dying prematurely are all things that have varying probabilities (speeding ticket>premature death), but their respective impact is much greater than their probability.

    Preparation truly is the best way to take out the, “what terrible luck I have” factor.

  8. Sean says:

    Danny, I disagree with buying multiple external hard drives for purposes of backing up your files. Unless you’re doing video or photo editing, that’s way overkill. Reliable external hard drives aren’t cheap; flash drives are, and they have more than enough storage space than most people need.

  9. Peter says:

    Flash drives are also more reliable than hard drives due to them not having any moving parts.

  10. Mariette says:

    Flash drives are limited in their memory capacity, so they are only good if you are only backing up important documents. If you have lots of photos and music that you want to backup as well then you are, in fact, better off getting and 80-100G regular USB or Firewire drive for your backing up.

  11. Ryan says:

    I don’t think Trent was implying the cars know what the speed limit is. He meant that cars are made to be most efficient at around 45-60 MPH. That’s why highway fuel efficiency is better than the city’s.

  12. Amanda says:

    I think one of Trent’s one main points is that there ARE things you can do to reduce the effect of bad luck, no matter how much you might complain about the situation you’re in.

    If you’re in a bad situation, do more than sit and gripe about it. Take practical steps to make your life better.

    THAT is a great takeaway lesson. Thanks, Trent!

  13. Susy says:

    Sounds like we have the same relative!!!

  14. Steven says:

    Good list! I have a couple of comments.

    Re: overdraft, I’d suggest getting your checking and savings accounts linked for overdraft purposes. If you overdraft your checking, money gets transferred from savings to cover it (assuming you have $$$ in your savings). There’s usually a fee, but it beats the bounced check fee(s).

    Re: paying bills on time, check into electronic bill payment. I don’t write physical checks any more – everything is done electronically. You have finer control, and you can be reminded of upcoming bills.

  15. Mrs. Micah says:

    I knew a family with that kind of thing happening. They also had no control over other areas of their life…no savings no nothing. Not much intelligence, either, my mom had to save them from a few clear ripoffs.

  16. Joe says:

    Good advice and great starting point to get people thinking.

    Problem is life can slap people around in ways that aren’t expected. Having kids that have accidents, diseases and ongoing care can quickly suck the financial life force from someone. Some people would say, “Get insurance.” However insurance can’t cover everything, we have one child that needs ongoing care that is non-conventional so no insurance will cover it and it runs approx. $300/month, not huge but it is $300/month that could be put to other uses.

    On the backup issue I went one further to setup up a cheap machine at a relatives house in another state that I backup to. We’ve opened the SSH port which is extremely secure (no successful hacks in over 4 years) and offers me complete offsite backups. For about $200 you can buy new equipment to do the same (NSLU2 and an external hdd).

    To make it an even 15 I might add what I’d consider to be even more important than the ones in your list.
    Exercise
    Eat Properly
    Start a small garden and learn how to raise fruits and veggies for maximum nutrition and you would cover both :)

  17. I totally agree with starting small on the emergency fund. My first transfer was only $50, but after some time I’ve reached that magical $1000 level recommended by Dave Ramsey.

    And good idea on the dual flash drives. I need to get a couple of the 2-4GB size.

    By the way, I had to spend about 15 minutes on the phone with WellsFargo to set up overdraft protection on my checking account, which I thought I had set up when I opened the account (somehow it wasn’t added even though I requested it). Their deal is really bad compared to ING, but it is at least better than nothing and getting hit with a $34 fee.

  18. Banban says:

    Thanks, Trent! I wish more people would learn from this post, especially the advice on emergency funds.

    My friend’s mother has always been living a tragic and “unlucky” life…or so we thought, until we saw how she spends her money. She almost has a six figure income, but spends like a millionaire — driving luxury cars, gambling, and shopping to excess.

    So when an emergency comes up, she has nothing to help her out of it. So she always comes to us with sob stories of how desperate and tragic her life is.

  19. Rob in Madrid says:

    I second the motion on the emergency fund. It makes all the difference in the world. I would add as well to get used to spending less and saving money each week. That in it’s self will go a long ways in mitigating the damage of something going wrong at the worst time. By being used to spending less really helps when money is tight, you don’t feel the urge to “what the hell the budget is shoot anyways” feeling that makes things worse.

    Lastly I would add for those that still have debt and don’t have much of an emergency fund is to minimize the damage.

    One of the downsides to living overseas is you usually are the one who travels to visit family. In this case my Mom passed away a few weeks before we were planning on going home Basicly we were faced with two expensive trips back to back. We couldn’t cancel the second one as it was for a wedding and the flights were paid for. Also being peak travel season meant we couldn’t get cheap flights. Basically it blew a 5000€ hole in the budget, plus the cost of another trip home 6 weeks latter. Thankfully we had already started an emergency fund and had gotten used to having cash in the bank (as vs credit card limit free) which really cushion the damage. But it still left us 4000€ short. For that I arranged a short term low interest loan from the bank to cover it until my Wife got her annual bonus (it’s not free money it represents a year of hard work – next year it goes to the house fund first time for that). Previously we would have used CCs etc to cover everything. This time we had cold hard cash to draw on. It was a nice feeling.

    We also decided that when she gets her bounus we pay the loan off and the rest goes in the bank towards an emvergency fund. That and any extra money from our budget will go there as well rather than going to debt as planned. For debt we’ll just let our debt snowball run.

    Again let me add thank you so much for all the work that you put into making this blog happen. It’s really helped us alot in changing how we handle money and has saved our bacon several times over the last six months. I’m looking forward to the day I can email you and tell you that we’re debt free!

    Keep up the good work!

  20. Erich says:

    A couple of things that help me avoid the full “cost of bad luck”, which I haven’t seen mentioned yet:

    1. Perform the reccomended regular maintainence on vehicles, appliences, etc. This helps prevent breakdown and helps you notice problems earlier (when they are less expensive to fix).

    2. Know basic emergency repairs. If you know how to change a tire, this will save you the cost of a tow truck and let you get to a mechanic quicker.

    3. DIY for simple things. In the case of my bicycle, the local bike guy taught me how to fix a flat, true my wheels, etc. Most independant folks will teach you how to do this. In the case of my bike guy, he’s busy enough that it’s far more time/cost effective for him to teach me how to fix my own simple problems than to fix them and charge me for it, and he would rather not take my money for something I could easily do myself.

    4. carry the proper insurance, this can keep you from financial ruin on the high end of problems. Trent has a couple of really good articles about this here.

    5. Always run the numbers for the worst case scenario. This lets you mentally prepare, and helps you avoid expensive mistakes when you react to an emergency. It also helps avoid the mentality alluded to in the article “If only bad things wouldnt happen to me, I could do this”. Mental preparedness will help keep a pma, and probably help with the bottom line.

    6. “Bad luck” is frequently opportunity in disguise. It’s a chance to re-think a strategy that failed. Most of the time it will only be a lesson learned and opportunity to grow, but occasionally it can be capitalized into something better.

    7. Im a firm believer in karma, if you help people you know in cases of bad luck (not necessarily financially, just a helping hand or even advice when solicited), it will come back as a buffer to your own bad luck.

    hope this helps someone
    Erich

  21. Aaron says:

    I like the idea of building multiple streams of income to protect as well as diversify your revenue stream. Multiple incomes, even if they are rather small, can turn out to be a pretty big deal.

  22. daydreamr says:

    I would like to add a safety deposit box to this list. It is a relativley inexpensive way to keep important papers and valuables safe. I am going on my 2nd year of renting one. It didn’t sink in until a friend of mine, who’s house burnt down, told me that they lost all their important papers. Car title, social security cards, birth cirtificates…They had no way of proving who they were for a good long time. They lost money, valuables like jewelry etc. What a mess. She said that if she could do things over again, she would have spent the money for a safety deposit box and kept important items in it.

  23. MVP says:

    I had to learn the hard way not to speed. I got so many speeding tickets, I could barely afford them anymore. Now I routinely set cruise control at the speed limit, even in town, and I figure I’ve saved myself hundreds, maybe thousands, in tickets, insurance and gas mileage – not to mention the anxiety!

    Also, emergency fund, emergency fund, emergency fund. Have one, no matter what your income is. You’ll need it eventually, and it’ll save you loads of unnecessary stress when that rainy day comes. And it WILL come.

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