The last thing any person’s budget needs is an unexpected expense popping up that ruins the amount of money you’ve been able to save. With an average national savings rate of only 5.1% in 2022, fewer and fewer Americans are likely to have cash on hand in the event of an emergency. This is why learning everything there is to know about out-of-pocket expenses, including the different types and how to manage them, is critical from a financial standpoint.
What Are Out-of-Pocket Expenses?
In looking at the question of what are out of pocket expenses that a person may be faced with in their life, it’s important to break down the definition. An out-of-pocket expense simply refers to a direct payment of money from yourself to either someone else or an organization. Out-of-pocket expenses can sometimes be reimbursed through insurance or other similar methods.
Different Types of Out-of-Pocket Expenses
In general, there are two categories of unexpected out of pocket expenses that a person may be faced with: smaller household and daily life expenses or medical expenses. Examples of smaller household expenses that a person may need to meet out of pocket include:
- Rent payments
- Utility payments
- Credit card payments
- General bill payments
- Student loans
- Vehicle breakdowns or repairs
- Home repair
On average, these types of out-of-pocket expenses won’t be more than a couple hundred to a couple thousand dollars on the high end. It’s more likely that a person could meet these smaller expenses with cash they have on their person. However, serious medical expenses can include:
- Trips in an ambulance
- Surgery costs
- Non-covered medicinal treatment
- Having to see an out-of-network specialist
- Mental health care or counseling
- Dental care
These types of unexpected expenses start, at the low end, costing a couple thousand dollars in most cases, and they can be so expensive, mainly in the case of hospital visits, that a person may be faced with a bill over $100,000. Regardless of the type of expense, there are a number of key ways a person can start covering their financial costs.
5 Ways to Cover Expenses You Weren’t Anticipating
No one wants to be faced with a high cost and told to pay up quickly, but bills won’t pay for themselves. To avoid facing financial disaster, follow the below five tips to quickly get your expenses covered:
1. Take the Time to Reorganize Your Budget
When facing emergency expenses, there is no better time to take a look at reorganizing your budget. See if there are any flexible parts of your budget that you can adjust to squeeze in the emergency expense. If you had a vacation planned for the year and had set money aside, as an example, it might not be ideal but taking funds from there for the expense is an excellent strategy to follow.
2. Consider Financing Options
While taking on debt to solve your short-term financial problem isn’t exactly an ideal situation, if you have a strong credit score and solid history with debt then it could be effective. Personal loans are great choices for small expenses, as they often have loan amounts ranging from $1,000-$100,000, meaning almost an emergency expense would be covered. Be cautious, however, as interest rates range drastically form 6%-36% on average dependent upon the factors listed in your application.
3. Ask Friends or Family Members for Help
Never be afraid to reach out to your friends or family members for assistance. When faced with financial difficulties, many people often want to solve the problem on their own as opposed to asking for help. Never let pride be the reason you fall into financial distress. If you have loved ones who are willing to help, take them up on their offer and pay them back at a comfortable pace.
4. Liquidate Less Important Assets
Liquidating your built-up assets is a troubling situation, but it is better than diving into your savings account. If you have investments that aren’t as important as your primary portfolio, consider liquidating them to gain access to much-needed cash. Only as a second-to-last resort should you start liquidating your primary portfolio.
5. Turn Towards Your Emergency Savings
Finally, in a worst-case scenario, you can turn to the emergency savings account you built up for the funds you need. However, many Americans do not have a large sum of money in this emergency savings account. If you do have funds, however, then turn towards this option for your expense.
General Money Management Tips to Bolster Net Worth
Overall, meeting your financial obligations in life requires effective money management. Use the following tips to better manage your money moving forward:
- Start dedicating savings towards your emergency account. It’s been reported that 56% of Americans cannot meet a $1,000 expense, so start dedicating 5-10% of your paycheck to go towards an emergency account.
- Save up at least 3-4 month’s worth of expenses before you start putting money into investments and other assets
- Stick to your budget as closely as possible on a monthly basis, which means place an emphasis on building a realistic budget
- Never put all your eggs in one basket for your investments
- Pay off all debt you have as soon as possible
- Track your spending to ensure you have visibility into your costs
- Start saving for retirement as soon as possible to help ensure you have a nice nest egg to fall back on when you are done working
The Bottom Line
Taking into account the current state of the economy, it’s understandable that a person may not be able to save a large sum of money. However, it’s important to then take preparatory steps so that in the event of an emergency requiring cash out of pocket you can meet your financial obligation. Don’t settle for losing the money you’ve worked so hard to save when you can find alternative ways to meet your out-of-pocket expenses.
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