Unexpected expenses are a major pain. You can have all your ducks in a row, be doing all the right things, and then all of a sudden… Wham! Your washing machine breaks, a surprise school trip pops up, or worse. These are annoying for everyone, but if you don’t have savings to fall back on, they can be much more than annoying.
If you need to use credit to pay for an unexpected expense, it can have far reaching consequences that aren’t always obvious at the time. Your bad luck can very quickly turn into terrible luck. Something like the washing machine breaking shouldn’t be life changing, but it could be.
If you put the unexpected expense on your credit card and just pay the minimum payment, even just a £250 expense can take 10 years to clear.
If you use your overdraft to pay for it, you may end up paying way more than you think. If you are like many overdraft users across the country, you could end up trapped in your overdraft for years. If you can’t use a credit card or overdraft to cover an unexpected expense, then maybe you can try borrowing from your friends or family, but everyone tells us this is one of the last things they’d do since it can be very embarrassing.
Finally, if you have no other way to get credit, a payday loan may help you pay for the expense. But just by taking out a payday loan, you are 20 times more likely to end up with severe debt problems in your life, so try to avoid these if you can!
Unexpected expenses, by definition, are unexpected. It’s hard to know when they will come and in what form. This makes it very hard to prepare for them. If you knew you’d only have 1 every 5 years, then maybe they aren’t something to worry about. If you knew they would happen once a week, then preparing for these would be one of the most important life tasks.
But we don’t know.
However, we can take a guess based on the information that is out there. According to Money Advice Service, almost three in four working age Britons will experience at least one unexpected expense per year. Stepchange reports that 4 in 10 people people who are ‘struggling to save’ will experience an unexpected expense at least once every six months. Based on these two data points, we believe its pretty safe to assume that you should expect to have at least 2-3 unexpected expenses per year.
Our own research, spending umpteen hours speaking to people with limited savings confirms this number. Some people were lucky and didn’t have an unexpected expense in over a year, but most people experienced something in the range of 2-3 per year.
Put in another, slightly more scary way – If you don’t have savings, you can expect at least 2-3 potentially life changing events per year.
So now that we have a rough idea on how many times we may experience one, what about the cost? There’s a difference between having lots of unexpected expenses that are low in cost, versus one or two that need a lot more money to solve.
Once again, the nature of these events makes it impossible to know for sure how much they will cost. But once again, we can look at data and research to create a guess. We asked a number of financial inclusion experts for an answer, and they generally said around £250-270. If you look at the typical payday loan amount, it’s also £260. Payday loans should really only be used for unexpected expenses, so this is another good indicator. Also, we found that many people without savings found a £250 unexpected expense ‘extremely stressful.’
In our conversations with people we found that unexpected expenses are everywhere and can come from anything. We heard stories of freelancers having their equipment broken, roofs leaking, pets getting sick, etc. etc. etc. Basically, anything that can go wrong eventually will go wrong.
However, some of the most common ones are as follows:
Broken washing machine (Who has this not happened to?)
Broken dryer (Same as above)
Parking ticket (Always happens at the worst time.)
Surprise school trip (Can’t say no…)
Car repair (Why does the MOT always find something that wasn’t wrong a day before?)
Pet getting injured/unwell (Can’t say no..)
Phone breaking (Urrgh…)
The thing about unexpected expenses is that while you can’t predict when they’ll happen, they should be 100% expected to come at some time. So if this is the case, then it makes complete sense and should be considered irresponsible if you don’t at least do some preparing for them.
The easiest way to prepare for these events is to build up your savings. Everyone knows this by now. But from our conversations with people, this is a lot easier said than done. When you don’t have savings, building savings is very hard. Expected expenses are tough enough to deal with.
Another way to prepare for these events would be to get an emergency credit. But you need to be very disciplined, avoid the minimum payment trap and really only use it in case of emergency (Maybe you could put it behind one of those ‘break if emergency’ glass things?). If you aren’t careful, interest and charges could start racking up, creating a new unexpected expense to deal with!
You can also take out insurance. You can get mobile phone insurance, contents insurance, or pretty much any kind of insurance. This will work as long as you insure the right thing. But, Sod’s law, if you insure 9 things it will be the tenth that ends up hitting you.
The best way to prepare for unexpected expenses is to build up some savings, so you can use them if you get into trouble. However, for millions of people in the UK, saving isn’t much of an option. Wouldn’t it be amazing if there was a way to cover unexpected expenses, that didn’t charge high interest? A way to borrow that was designed to minimise the time people spent in debt, not maximise it?
We think so too… So we built one. To find out more just click here!