April 26, 2023

How to Deal with Unexpected Expenses

How to Deal with Unexpected Expenses

Mo' money, mo' problems?

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“Dude, why is being alive so expensive?”—an actual sentence I said aloud to Henah back in January when my dog needed surgery, my husband and I got a giant tax bill, Henah’s travel insurance wouldn’t come through, and a formerly in-network doctor informed her she owed them a large sum since they were now (surprise!) out of network. (USA! USA!)

One of the rudest awakenings of adulthood is the realization that simply paying for the boring stuff eats up a lot of your income, which can be incredibly demoralizing when you’re trying to make progress.

So which tactics (both financial and psychological) can help you plan for the mundane or unexpected? Will this ever stop, or do your financial problems just scale proportionally with your net worth?

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Katie:Welcome back to this week's episode ofThe Money with Katie Show, Rich Family. I am your host, Katie Gatti Tassin. And this week we are talking about the hashtag #shockfactor that comes with unexpected expenses. But first, allow me to regale you with a story. I will never forget standing outside of the Eatzi’s on Lovers Lane in Dallas, Texas, when I received the phone call that ushered in my first full-time job offer. Because when the recruiter told me my official adult salary, I had to cover my mouth with my hand: $52,000. I had more money than God. Blissed out on a pharmaceutical-grade endorphin cocktail of pride and financial abundance, my mind immediately just started racing to plan for all the incredible things I was going to buy with my new monstrous income: a Louis Vuitton bag; Whole Foods shopping trips instead of Trader Joe's, like the plebes; dresses that didn't come off of a sale rack. I really could not believe my good fortune, and to this day, still one of the most surreal experiences of my life. 

Then a few weeks later, I got a bill in the mail: $32 for my August water usage. “Wait,” I said aloud to myself, still suspending the envelope in mid-air in my empty apartment kitchen. “I have to pay for water?” And thus began my months-long, painful realization that extends to this day, that being alive is expensive. It has been a rude awakening, to say the least, because growing up, I had to save my money for the fun things that I wanted, like a blue, green, and purple corduroy coat—yeah, really good fashion choice—from The Children's Place that had this white faux fur piping all over it. My mom called it my Joseph's Technicolor Dreamcoat. And my first Motorola cell phone and my pink electric scooter. I was accustomed to the “work hard,” or you know, as hard as I could work for being 10 years old, “save, and then go ham at Club Libby Lu” mental model of money. But things that we needed, like gas and water and food and school supplies, that was all provided to me free of charge by my benevolent handlers, Mom and Dad. The socioeconomic privilege of never having our lights turned off or never having to wear too-small shoes felt natural, normal even, because it was all I had ever known.

That's why my transition to adulthood post-grad was so eye-opening. It was the first time that my hard-earned money was devoted to paying for these boring, necessary, run-of-the-mill expenses like water and heat and insurance and doctor’s visits. Cognitively, of course, I knew this. My parents had prepared me for reality, through detailed explanations of the world-rocking onslaught of expenses that would require me to balance a checkbook…though I still have never done that. Sometimes it almost felt like my mom kind of had a good time, like took pleasure in telling me about all of this stuff. Like she was just so excited for me to cross the finish line of adolescence and get the hell out of their checking account for good.

But nothing can prepare you for it until you actually live it. When my mom gave me the car insurance bill after I crossed the stage at graduation, I knew my income would have to support the boring stuff; I just had no idea how much the boring stuff was going to cost. We'll be right back after a message from the sponsors of today's episode. 

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Katie:So maybe you can relate to this non-exhaustive list of the adult requirements that took me by storm. To start off, when I received my first paycheck and it was several hundred dollars less than I had anticipated, I felt intense regret at my decision to heed my parents' advice and contribute to my “retirement plans,” which I did not understand at the time. But you know, no matter; that's best practice, right? And then I began renting my own apartment…with a roommate, because my new job wasn't being the queen. And just like that, $888 of my $2,800 per month take-home pay: poof, gone. That's okay, right? I would think to myself. $1,900, that's still a lot of money. “I can buy a lot of vodka sodas with that,” I probably said out loud while climbing into the backseat of an overpriced Uber on my way to a bar, and…well, not so fast. As time passed, I watched more and more of the money trickle out of my checking account. It was 30-some-odd dollars for water and then another $25 for valet trash, which was a service that I actually asked the leasing office to turn off for my unit, only to be told that it was “required.” Super cute. $40 for my half of wi-fi, another $75 for my cell phone bill. Somewhere between $60 and $100 each month for…electricity? Yeah, when all was said and done, the roof over my head and all of its related utilities easily ran me around $1,100 per month, which really didn't feel too painful at the time 'cause they were paper cut-sized hits: $30 here, $40 there. 

But the meltdown that ensued when I received my first annual car insurance bill? Geicogate will never be forgotten. Growing up in rural Kentucky, my car insurance was dirt cheap, in hindsight. It was $600 per year: no comprehensive, no collision, just vibes. And I had mentally steeled myself to this figure. I knew in the back of my head, “Hey, this bill is coming due soon. I'm gonna have to re-up and pay for this.” So you can imagine my surprise and horror, after I registered my vehicle in the state of Texas, I reapplied for a new quote and I learned that my actual car insurance costs would be $1,700 per year, since Dallas freeways are like a scene out ofMad Max. And I cried. I cried a lot. I had not planned on a one-time expense so large, especially not so soon after getting my first job, but it would've cost even more if I had paid monthly. So I emptied some of my savings and I let 'er rip. 

Then, because I didn't realize how expensive it would be to buy furniture, I had an almost empty apartment for the first year of my lease, and I'd find myself wondering every few weeks, “Where did all my money go?” Worst yet was the stuff I couldn't plan for, which seemed to happen weirdly frequently. I'd run over a nail and need a new tire: $300. Or accidentally visit a dermatologist who was out of network: $150. I'd get pulled over for speeding: $250, and then I'd need to pay for traffic school: $200. It felt like every misstep had a three-digit price tag attached. And every good intention I had to save money would be thwarted by careless or unavoidable blunders. It felt utterly demoralizing to work all week for a paycheck that ended up being frittered away on the mundane necessities that I had taken for granted my entire life. It's a little like the piece that we published last year that we’ll link in the show notes, about how being poor is paradoxically very expensive. And now in retrospect, I just wonder: How can anyone expect to get ahead on a sub-living wage in those types of circumstances, when every mistake can be so costly? I became suddenly aware of how easy and privileged my life had been up until that point, and I was only now realizing at the age of 21 how expensive it was to keep the metaphoric and literal lights on.

Growing up, money was the key that unlocked fun. And as an adult I realized how much money it cost just to survive, how much you need to earn to even be able to have a little bit of fun, to say nothing of saving at the same time. The constant helplessness I felt every time a new, unexpected charge threw a wrinkle in my Discover statement is ultimately what ended up driving me to become obsessed with personal finance, because I felt so out of control. And I wanted to feel in control of my financial situation, not the other way around. Because when I heard that I'd be earning more than $50,000, I figured my financial situation would sort itself out by default. I would effortlessly save money with that much money. How could I ever feel stressed? How could a bill ever catch me off guard? As I learned in those first few months, though, it goes a lot faster than you think. 

So I finally reasoned with myself: Maybe $50,000 is not enough to avoid the unexpected, but I bet $75,000 would be. I told myself that if I could just get up to $75 or $80k, this stuff would not impact me anymore. And now, seven years later, I have some reflections. Because if you find yourself listening to this and thinking, “Why is she talking about this years-old experience? Surely she's escaped from this financial undertow, right?” You would be wrong. 

The reason it feels topical and relevant again is because I realized, many years, net worth calculations, and income changes later—yes, the $80,000 salary is also in the rearview—that this personal finance experience is actually universal and practically inescapable. Sure, the scale of the chaotic budget intrusions and the afflicted checking account balance has changed over time. An unexpected $40 expense does not rattle me the way that it used to. But the funny side effect of financial progress is that it usually just serves to unlock larger interferences. A car registration hiccup replaced by a giant tax bill. Pricey car insurance dwarfed by much-higher insurance premiums for new types of insurance that you did not used to need or even knew existed before, because now you have more to protect. A tire replacement? Yeah, that now pales in comparison to repairs on major assets like real estate, because as your asset base grows, so too does the scale of your potential liabilities.

I'm reminded of Mark Manson's theory inThe Subtle Art of Not Giving a F***. You're always going to have problems. Your problems are just gonna become better. If a pipe bursts in your $500,000 house and it costs you $20,000 to repair all the damage, that's annoying. But the underlying truth that you own a home worth half a million dollars usually is an indicator that you've got good problems. There is an implication about your financial stability inherent in having problems like these. You've got a property tax hike? Well, you're a property owner. Expensive professional liability insurance? Well, you have a profession that is worth ensuring, which is usually reserved for only relatively highly paid people, not just Mariah Carey's vocal cords. A travel delay on your international vacation that is causing you to blow an extra $500 on a different flight? Well, you are someone with enough money, time, and access to travel internationally.

I repeat: There is an implication about your financial position inherent in the type of money problems that you have to deal with. Now this isn't supposed to be like a “Hey, check your privilege” exercise in finding silver linings. It's more of a reminder that we will always have expensive, boring, mundane life expenses. And when I earned $50,000 and figured that by the time I made $80,000 that this stuff would stop throwing me off course, I misunderstood the fundamental truth of the matter. It will always feel like it costs more than it should to be a responsible adult, because such problems are going to scale proportionally with your income, assets, and access.

I noticed this a lot when I was working with women one-on-one to build out their budgets, because we'd review their past few months of spending and they would point to one-offs or uncommon expenses that seemed to crop up every few weeks, insisting that that did not need to be built into a budget and that they could save the ludicrous amount we were contemplating. But there will always be an uncommon one-off expense. It's more uncommon for a month to go by without one. We'll be right back after a message from the sponsors of today's episode. 

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Katie:So here's what I would go back and tell myself, and what I'm still telling myself now. There is no escaping the reality that being alive is just expensive, and even great financial progress can't insulate you from the unexpected. My producer, Henah, and I think and talk about money for 40 hours a week, and there was a rough patch at the beginning of the year when every other day we were stressed, Slacking one another about something that had gone sideways and created unexpected financial strain in one of our lives. This is where “hoping for the best and preparing for the worst”-style planning comes into play. And there are three major things that would've helped me smooth the choppy waters back then and still serve to now. 

Number one: Build a generous “Miscellaneous” buffer into your monthly expenses plan. Now crucially, this is not the same thing as an emergency fund. This is an actual line item in your budget. So after my second traffic citation—yeah, it was a rough year, I don't know—I literally added an expense category called “Oh shit,” and I assigned $150 a month to it at the time. So I was earmarking the funds on a monthly basis for mistakes and accidents. And at the time that represented about 5% of my take-home pay. But it meant it was not money that looked available to me for other less important things. So the mental freedom that like, “Oh, it's fine that I wasn't expecting to pay $50 for this work fundraiser, I can just stick it in this miscellaneous budget,” it unlocked this mental freedom for me. It was second to none. Now my miscellaneous category is proportionally larger, but it still serves the same purpose. It buffers for the unexpected. It insulates me from the emotional turmoil of feeling like a failure for not planning perfectly. And as I quickly learned, the unexpected can take many forms, and in that way it is predictably common. Anecdotally speaking, it seems like unpredictable expenses usually account for 5% to 10% of an overall budget. So if you're currently living a lifestyle that costs $3,000 per month, assume and plan for anywhere between $150 and $300 each month on bullshit. 

Number two—and this one kind of sounds depressing—but avoid counting your chickens before they hatch. This will help you avoid disappointment or worse. So I recently received a bonus that I began making plans for the moment I became aware of its existence months in advance, and I decided I was gonna spend 10% of it on something frivolous and ridiculous, and then invest the other 90%. So I'm having these thoughts, toggling between the Neiman Marcus and Saks Fifth Avenue tabs. 'Cause what can I say? Old habits die hard. And then my dog needed an expensive surgery, and I received an unexpected medical bill. And our insurance premium on a new vehicle doubled. Within a matter of days, far, far more than 10% of the bonus amount, which had previously felt like free money raining down from the heavens, had already been accounted for by the litany of unexpected, boring, real-person life costs. And it reminded me that found money always seems to have a way of being rerouted. And so making plans for “unexpected,” quote, “unexpected” cash before it even arrives can often just lead to disappointment when life intervenes. 

And number three: Never accept the first offer. So in many cases, a lot of the things that we're discussing, like traffic citations and insurance claims and quotes for repairs and utility bill increases, all of these things, they're often negotiable. For example, when I blew out my second tire in front of the construction site near my apartment, I contacted the development company, because the location of their construction was positioned such that it would be impossible for me to leave the apartment complex without driving past it, which was often littered with nails and debris. So hence my two blown-out tires. And I was able to find their contact information online. So I sent this email blast out to request reimbursement, given the situation. I got flat-out rejected by several of the people who replied, but someone at the company ended up responding apologetically and cut me a check. So you never know if you don't ask, right? 

The same goes for denied insurance claims, medical insurance. This is an industry that thrives on opacity and a general lack of awareness. Nine times outta 10, the bill is gonna be wrong. So if the bill I received does not match what I was quoted, almost always I will call billing and I'll try to negotiate it down. I'll either push back on the charge entirely or try to strike a deal. You can do this by saying something like, “I can pay today if you'll cut the bill in half.” Or you can get unfair charges taken off entirely, like in the case of preventive care services, which are supposed to be covered by your insurance, legally. So we will link the list of preventive care services that are legally supposed to be free in the show notes. 

And finally, to bastardize the “know your worth and add tax” axiom, know how much your life costs, and add 20%. If you're doing renovations, budget for 20% more than you think you should. If you are having a wedding, plan to spend 20% more than that initial estimate. Getting a new car? Yeah, don't forget about title taxes, fees, annual registration and insurance costs, which are higher for higher-priced cars. Go figure. 

Part of what made my financial coming of age so painful was a misalignment of expectations about what it would take to feel financially secure, and what money was ultimately for. My original conception of money was that I need to work for it in order to have a lot of fun, not just keep myself alive, which sounds really naive, but I was nowhere near as conservative as I should have been in my original planning. The same goes for doing things like buying your first home or making plans for a tax refund, or finally taking that trip to France. You hope for the best, but financially plan for the worst. 

All right, y'all, that is all for this week. I will see you next week, same time, same place, onThe Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from Kate Brandt.