I have an old house (built in the 1920s). I also don’t have brand new appliances and house systems (furnace, plumbing, etc). This means that it is relatively often that something in my house breaks down. Does that ever happen to you? From a financial standpoint, the question then becomes what do we do? How do we afford to fix it? Here are 3 options:
1. Have an emergency fund.
This is my personal favorite. I recommend having an emergency fund of 3-6 months worth of expenses. That way, if a major appliance goes down, then you have the money to pay for it. I realize that an emergency fund of $10,000-$15,000 is not something you end up with overnight. It may take awhile, but if you set it as a goal and put all of your focus and attention on it, it can happen quicker than you think. My wife, Mandy and I had some major furnace repairs right in the middle of winter this past year. Luckily, our emergency fund was used to cover the expenses. It provides a huge level of peace to know that your are not one emergency away from a financial disaster.
2. Wait and save!
This is where a little creativity mixed with some grit comes in. I’ll use an example from Mandy and I’s life to explain what I mean. A couple of years ago, we were saving all of our money towards our health savings account because we had our second child on the way. It was a huge expense coming and there was no escaping it. Right in the middle of that frenzied savings, our dishwasher broke. We literally didn’t have an extra dollar to spare as we were putting away every single one to pay the hospital bill. Instead of paying to have it fixed, we actually did dishes by hand (oh, the humanity!). We did it that way for about two months until we had the money to cover the medical expenses. Sometimes, that is what it takes. Let’s be honest, most people would not sacrifice for a short two months in order to avoid going into debt. Once you make a commitment to avoid debt, however, it makes it the only option.
3. Pay for it with credit.
Unfortunately, this is the option most people choose. The culture has driven into us that fixing or buying a new one when something breaks is just what you do. It doesn’t matter if you have the money or not. In fact, that is exactly what credit is for. The fact is that is how most people end up with $40,000 or more in credit card debt. It starts with an “emergency” you just had to fix. Then another and then another. I have yet to meet anyone whose plan was to get into massive amounts of debt. But the mentality that certain things have to be fixed or replaced immediately, causes us to do stupid things. I know it’s hard, but I highly recommend avoiding this option.
Ultimately, it’s up to you which of the above options you choose. I can just speak from personal experience in my own life and with working with my clients that any option that avoids debt is the best one. If you don’t have an emergency fund, then start one. If something happens before you have one in place, then think of creative ways to work around the problem. It will be well worth it in the end.
I feel your pain. We have an older home that is approximately 50 years newer than yours. It has eaten savings until they are almost gone. New appliances, furnace, water heater, insulation, roof, I could go on but you get the point. If we can ever sell it we will never buy a home that is so old. It has been the biggest money pit we have ever had.
Mike Young says
I hear ya JMD. Our problem is that the location is perfect. It’s square in the middle of our city, so we can get anywhere in about 10 minutes. It also makes it easy for me to walk or ride my bike many places to save on gas money. The expenses can get crazy though (we haven’t even mentioned heating and cooling the place!)
Mike Nulty says
never use credit, it is not worth it for such small ammounts
Mike Young says
Totally agree Mike!
Chris @cfcents.com says
I always hate using words like “never” or “always” when it comes to giving PF advice. I prefer concepts to rules. Concepts “avoid debt” or “minimize debt the amount of debt you take on”. With that said I agree that debt is probably not the best answer, but give the potential purchase (dishwasher) I don’t think it would be unreasonable to go to Lowe’s or Home Depot and see if they have interest free financing that would work for buyer. I have used interest free financing in cases where I had the cash to cover just so I could keep my cash for the time being. Just don’t let it become a bad habit.
Mike Young says
Chris, I understand the idea of concepts, rather than rules, but I guess I’m just more direct. It’s part of my personality, good or bad! Here’s the only problem. It’s been said that up to 70% of “free financing” contracts are not paid off in the given time, creating a terrible situation where they are usually 24% or higher loans with interest tacked on to the beginning of the contract. I have met with many clients who have had $10,000; $40,000; even over $100,000 in consumer debt. None of them said that was their plan. EVERYONE plans to pay it off, but, unfortunately many do not, hence, our debt problem in this country. So, for me, it’s just not worth the risk and, plus, having a family business in retail, I know that the store will give you a discount for paying cash which will save you money as well! Anyway, thanks for the comment, though, it really is a great debate that is one of those that will never be fully settled!
Loved this article! I’m in the process of creating my emergency fund right now so reading this just makes me that much more motivated so I won’t have to use credit.
Mike Young says
Awesome Kristen! It is a great feeling of peace and relief to have it in place.