Money Management
Unexpected Expenses: My Back-Up Plan Flow Chart
Picture this: you’ve finally managed to get your finances in order and are making progress toward your financial goals… when a large, necessary but expected expense pops up. This is something that happens to Americans every day. What’s more, as all too many surveys have told us, the great majority of us have no good plans for paying off such purchases of $500 or more.
Even as someone who’s “good with money” and writes about personal finance for a living, there are still plenty of instances where unexpected expenses have caused me anxiety. Luckily, however, I’m in a position where I do have a few options for handling these situations. In fact, I basically have a mental “flow chart” that leads me through the best way to go about paying for these purchases.
Now, I’m finally ready to take this “flow chart” out of my head and present it to you all:
Step 1: Can I Easily Pay Off the Purchase in a Month?
If yes: Pay with the most applicable rewards credit card and pay the balance in full from checking when due.
If no: Move on to step 2.
Step 2: Can I Pay Off the Purchase in a Month By Moving Money?
If yes: Proceed to Step A.
Step A: Can you cover purchases with savings account funds?
If yes: Do it – Pay with the best credit card, move needed funds from savings to checking, and pay off the full balance
Details: Savings accounts (especially high-yield ones) are a great place to store extra funds while keeping them accessible. In turn, when an unexpected expense comes up, tapping savings is a perfectly logical Plan B. Of course, there is a balance to be struck here as you likely won’t want to completely drain your savings — especially those earmarked for larger emergencies or other important money goals. Therefore, you might want to combine this step with a subsequent option.
If no: Move to Step B.
Step B: Can you redeem credit card rewards?
If yes: Depending on the redemption value available for statement credits or cash deposits, this may be a good (albeit unfun) way to use your rewards. So, pay with your credit card, claim a statement credit, or deposit cash into your checking and use it to pay off the balance.
Details: There are many fun things you can do with credit card rewards — including redeeming points for free travel or other exciting experiences. Although cashing in points toward an unexpected bill is decidedly less sexy than those options, tapping your earned rewards to stave off debt can certainly be worth it. At the same time, the viability of this option will depend on your rewards card.
For cashback cards, the process of redeeming your rewards toward paying off your purchase should be pretty easy. Moreover, you should get 1¢ per point with this option. However, this might not be the case for other credit card currencies. For example, American Express Membership Rewards Points are only worth 0.6¢ per point when redeemed for statement credits (although you can get 0.8¢ per point if you deposit MR points to an Amex Rewards Checking account). Keep this in mind when deciding whether it’s worth redeeming your credit card rewards as part of your payoff process.
If no: Move to Step 3
Step 3: Are “Promotional” Financing Options Available?
If yes: Move to Step A.
Details: With some large purchases, you may be able to apply for interest-free financing. That’s exactly what we did with the recent purchase of a water heater for our home. However, with the word “promotion” in there, you can bet there’s a catch — as you’ll see in the next step.
If no: Move to Step 4
Step A: Can you pay off the purchase during the promotional period?
If yes: This may be a viable option, either in whole or in combination with a downpayment funded by the above sources.
Details: If you can pay off your purchase while paying 0% in interest, it could be a good deal when compared to other options (such as incurring credit card debt). Unfortunately, there are also some pitfalls to avoid here. First, if you don’t pay off the full balance of your purchase during the stated promotional period, you may be charged interest dating back to when you first made the purchase. For example, in the case of our water heater, we have six months to pay down the balance — otherwise, we’ll need to pay the deferred interest plus any interest going forward.
Something else to note is that, in some cases, these promotions also state that no payments are due during the period. This may sound like a good thing — but it also means that you won’t get any reminders to make payments. In turn, this may leave you susceptible to missing the end of the promotional period and incurring interest. So, if you do choose this option, just be careful.
If no: Move to Step 4
Step 4: Which of Your Credit Cards Has the Lowest APR?
Detail: Ultimately, in my case, the current Plan D is that I ended up carrying a balance on one of my credit cards for a few months. If this were to happen, I’d be sure to check which card has the best interest rate — or might even consider a balance transfer after the fact. With that, though, my flow chart ends.
I do want to emphasize again that I am in an incredibly fortunate position where my “worst-case scenario” is a day-to-day reality for millions of other people. Nevertheless, I hope this flow chart can give you a couple of ideas for dealing with unexpected expenses in your life. Better yet, I encourage you to create your own rainy-day expense flow chart so you know what to do the next time an unplanned but necessary purchase arises for you.
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