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.