The most pernicious kind of debt is the kind that hits us when we least expect it. We have all gone through some kind of financial emergency, and if you’re not prepared, it can seem like the end of the world.
When I was a fresh college grad in my early 20′s, I received a call from my university bursar’s office. It turned out that one of my financial aid forms was missing a signature, and no one had caught it for two years, disqualifying one of my grants. The call took me completely by surprise, and the news hit me hard. In fact, I distinctly remember bursting into tears. All of a sudden, I owed an additional $5,000 at a time when I was living in New York City, paying 50% of my salary towards rent, and scraping together a pitiful salary working my dream job in publishing.
After the initial shock passed, I needed to figure how to deal with this new debt. Whatever your financial emergency may be, here are a few tips for getting through unexpected debt so you and your finances emerge unscathed.
Use Your Emergency Fund
Look in your emergency fund—you do have one, right?—and consider using your rainy day savings when you’re hit by unexpected debt. The emergency fund exists just for this kind of situation, so assess how much you can use. You might decide to use some or all of it so the rest of your financial system doesn’t take too big a hit. In the past, my emergency fund has allowed me to survive the pressures of losing my job or the shock of a new student loan until I was able to reach firm financial footing again.
Once you’ve used your emergency fund, make sure you rebuild it for your next rainy day. It may come tomorrow, next week, or next year, but with an emergency fund, you’ll be prepared to ride it out.
Create a Payment Plan
For my new $5,000 debt from my university, I set up a payment plan with the financial aid office. Because my school acknowledged that the fault had been theirs in not doing due diligence, the payment plan was interest-free. You can work out a similar plan with many companies and organizations, especially those that are related to healthcare and medical bills.
Ready to pay off debt faster?We can help you make a free, personalized plan to pay off your debt as quickly as possible. Our free tool shows you which debt to pay off first. Try it now.
Even if your creditors are unwilling to work with you to create a payment plan, and you do have to put all of that money on your credit card, you can put the same principles to work through the concept of the debt avalanche. Make it a regular habit to pay off debt, as our users have, and you’ll be surprised at how quickly your debt will shrink.
Find New Sources of Income
After my school saddled me with a new bill, I decided to find a part-time job to support myself and pay off the debt more quickly. It took a few weeks to find a stable part-time job, but I ended up with one that was a good fit with my own interests and provided extra income. I became an usher at one of the concert halls in Lincoln Center, a union job that was actually fairly well paid. The income I brought in went towards debt payments and created a bulwark against the realities of falling into poverty in New York City. Besides, being able to watch world-class classical music concerts and movie premieres for free was a great perk.
These days, there are many ways to bring in additional sources of income, many of which did not even exist until recently. You can look for a part-time job in your local area as I did. You can freelance: it has become simultaneously easier and more competitive through websites such as Elance and Guru.
The collaborative economy, where people share what they already own for a fee, is also a source of income. Many people have rented spaces in their homes on AirBnB or rented their car out through Getaround. You can even be paid to run errands and take one-time gigs through a site such as Taskrabbit.
Even with my part-time job and the payment plan, it took me nearly two years to pay off that unexpected debt. Financial experts always advise us to take control of our financial lives and be prepared, and after this situation, I certainly listened to that advice in a way that I hadn’t before. Now that I’ve survived such a financial blow at the poorest time in my life, I’m now much better prepared for the next one.
What about you? Are you facing (or have you ever faced) an unexpected debt? Share your story in the comments below.
Image credit: wavebreakmediamicro