How smart financial planning can save you thousands of dollars when things go awry
Over the past month, I've been handed bills totaling slightly more than $26,000 to cover costs above and beyond my regular living expenses. A little more than half that money was needed to cover my oldest child's first semester of college. The rest was needed as a result of water entering my basement during a recent storm, thanks to both a broken sump pump and a poorly built gutter system that didn't move water away from the house.
That total works out to several months' worth of take home income, gone in a veritable blink of an eye. And of course, those big bills don't mean I get to get out of the money I'm already spending to handle things like getting to work, keeping food in the fridge, and keeping the lights on.
Yet as expensive as this past month has been, it could easily have been much, much worse. By making smart asset allocation decisions before I needed this money, I've been able to avoid thousands in finance charges, interest payments, and other loan-related costs.
Cash is still king
The largest of those expenses – my son's college – is substantial, but certainly isn't all that much of a surprise. I had been saving in a 529 plan for his education since he had been born. Once he picked his school and we had a decent understanding of what his costs would be, I liquidated the stocks in that account to prepare to pay those bills. The money to cover that first semester is now sitting in a CD, ready to be cashed out at maturity to cover the bill.
The rest of that money -- addressing the water problem -- was not planned and was certainly more of an unpleasant surprise. For that one, it'll eat through most of my emergency fund by the time the fixes are completed. Yet even as the money is still flowing out to cover those costs, I'm working on the plan to refill that emergency fund to be more prepared for when the next unexpected major cost shows up.
After all, that wasn't the first time I've had to tap that emergency stash of cash, and unfortunately, it probably won't be the last. Yet the only way that money will be there for the next time it's needed is if I make the effort to replenish those funds before the next crisis hits.
How this saved me thousands
According to the US Department of Education, direct student loans to students currently have an interest rate of 5.5%, while PLUS loans to parents charge 8.05%. On top of that interest, the direct student loans carry a 1.057% fee while the PLUS loans carry a 4.228% fee. And of course, the lower-cost direct student loans are limited to just $5,500 for the year for my first-year son.
As an alternative to the school loans, as well as to cover the home repairs, I could tap my Home Equity Line of Credit. If I did that, however, I would still face a 7.49% interest rate, although I wouldn't face any additional fees above those interest costs.
Let's keep it simple and assume I had to borrow all $26,000 against my home equity. At a 7.49% interest rate, that would work out to around $1,950 in the first year's interest costs alone. Yet even that only tells a part of the story, since my son is just starting his college journey. We're expecting another seven or so semesters of those costs before he's done. If all of it were borrowed, it would easily add many thousands of dollars more in annual interest costs.
Get started now
The only reason I'm able to cover these bills today is that I put a plan in place years ago. By saving for my son's college since he was born, I built a nest egg that is able to cover his expected costs. By building an emergency fund before water found its way into my basement, I am able to both recover from that situation and reduce the chances of it happening again in the future.
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Getting that foundation in place takes time. Still, once it's there, it's so much better to have the money when you need it than to end up paying thousands of dollars in additional costs. So make today the day you start working the plan that puts you in a better spot to have the cash you need, when you need it. The sooner you get started, the better your chances of having the money available in place when those large expenses show up.
Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner offering financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
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