Are you familiar with the term ‘out of pocket’? As an English idiom, we use it quite often in our daily lives. However, when it comes to financial jargon, the term can take on a completely different meaning. This article aims to break down the true definition of ‘out of pocket’ and provide you with a comprehensive guide to understanding it.
The Basics
For starters, being ‘out of pocket’ in a financial context means that you have spent more money than you currently have in your account or that your expenditure exceeds your expected or allocated budget. When you have to pay for something but don’t have any cash on hand or funds in your account, you’re said to be out of pocket. Essentially, ‘out of pocket’ refers to your financial situation.
Related Terms
There are several other terms that can be used interchangeably with ‘out of pocket,’ and these include:
- Overdrawn
- Negative balance
- In debt
- Insufficient funds
- Operating at a loss
Types of Out of Pocket Expenses
Out of pocket expenses can be grouped into two broad categories:
Expected or Anticipated Expenses
These are expenses that you know and plan for in advance. Examples include:
- Rent
- Groceries
- Utility bills
- Transportation costs
- Insurance premiums
- Taxes
These expenses are predictable and should be accounted for in your household budget. If you find yourself unable to meet these expenses, it may be time to review and adjust your budget to reflect your current financial situation.
Unexpected or Unplanned Expenses
These expenses are, as the name suggests, unexpected and usually arise out of sudden circumstances that are outside your control. Examples include:
- Medical expenses
- Car repairs
- Home repairs
- Emergency travel
- Legal fees
- Unexpected job loss
These types of expenses can be particularly challenging when you’re already operating on a tight budget. Nevertheless, it’s essential to have a strategy in place for handling them when they arise. This can include building an emergency fund to cover unexpected expenses, creating a backup savings account, or seeking financial assistance from your local community or government resources.
The Risks of Being Out of Pocket
Being out of pocket, particularly for extended periods, can come with serious financial consequences. Here are some risks of being out of pocket:
Accruing Debts and High-Interest Rates
If you’re continuously out of pocket and have to rely on credit cards or loans to cover your expenses or pay off debts, the interest rates and additional fees can pile up quite quickly, leading to mounting debt and a spiraling financial situation.
Credit Score Deterioration
Being out of pocket for a particularly extended period can negatively affect your credit score. This can make it harder to obtain loans, insurance policies, and even employment in some cases.
Mental and Emotional Strain
Chronic financial instability and being out of pocket can cause anxiety, depression, and significant emotional distress as well. Money troubles can impact your mental and emotional health and strain your relationships with your loved ones.
How to Mitigate the Risks of Being Out of Pocket
Fortunately, there are ways to mitigate the risks of being out of pocket. Here are some tips:
Budgeting
Creating a household budget and tracking your expenses can help you anticipate expenses you can plan for, avoid overspending, and stay within your financial goals.
Building An Emergency Fund
An emergency fund can help cover unexpected expenses that would otherwise put you out of pocket. If possible, save up three to six months’ worth of living expenses in an easily accessible account.
Living Within Your Means
Resist the temptation to overspend or take on new expenses that you can’t realistically afford, and prioritize your household essentials.
The Bottom Line
Being out of pocket is a financial situation that’s easy to fall into and challenging to get out of. This article has explored the definition of ‘out of pocket,’ the types of expenses that can lead to it, and the risks associated with it. We’ve also discussed some strategies for mitigating these risks and ensuring financial stability. By being mindful of your spending, anticipating expenses, and building up your savings, you can avoid the stress and strain of being out of pocket and create a secure financial future for yourself.
Frequently Asked Questions
Here are some of the most commonly asked questions about being out of pocket and their answers:
What Does it Mean to be Out of Pocket, and What Causes It?
Being out of pocket refers to spending more money than you have, leading to a negative balance in your accounts or financial instability. It can be caused by either anticipated or unexpected expenses that you can’t afford to cover, overspending, or a lack of disposable income.
Is Being Out of Pocket the Same as Being in Debt?
Both being out of pocket and being in debt refer to spending more money than you have, but they differ in how they impact your finances. Being out of pocket is a temporary financial situation that can be resolved by adjusting your expenses or increasing your income. Debt is a more long-term financial obligation that requires you to make regular payments to pay it off.
How Can I Avoid Being Out of Pocket?
There are several strategies you can use to avoid being out of pocket, including creating and sticking to a household budget, building an emergency fund to cover unexpected expenses, living within your means, and prioritizing essential expenses.
What If I Am Already Out of Pocket?
If you find yourself currently out of pocket, the best approach is to focus on creating a plan to recover financially. This may include finding ways to increase your income, reducing your expenses, negotiating payment plans on outstanding debts, seeking new employment opportunities, or requesting financial assistance.
References
1. Money Under 30. Out of Pocket Costs: A Simple Guide to Understanding What They Are and How to Avoid Them. https://www.moneyunder30.com/out-of-pocket-costs. Accessed 24 August 2021.
2. Investopedia. Out of Pocket. https://www.investopedia.com/terms/o/outofpocket.asp. Accessed 26 August 2021.