Step One: Plan for the Unexpected Big Time Bill

The first step arises from debt from a one-time large expense – something that is too large to be paid for with your monthly paycheck, or by saving for a few months.

Many of these debts are investments in either an asset that will appreciate over time, or a income stream that will be greater over time. The most common example is the purchase of a home. Very few people are able to save enough money to purchase their home outright, or pay for their entire home out of a few paychecks. We use a mortgage to pay for the home after-the-fact, and to enjoy home ownership in the meanwhile. Another example is investment in education. Many people cannot afford to pay for college tuition outright – so we take out loans, planning that our future income stream will enable us to be able to afford to pay for the education after-the-fact.

The more insidious type of one-time large expense is the expense that is not an investment. The emergency, unexpected, unplanned-for bill – extreme medical bills, disability, failure of a business, a lawsuit judgment, or long-time unemployment. These bills can put a family under – forcing them to either sell assets, move out of their home, or declare bankruptcy, because they will never be able to pay off the debt with their income.
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