Have you ever written out what seemed like the best budget ever – only to find that a month goes by and, like all the months before, you have no clue what happened to your money?
This is where budgets and intentions can get in the way of actual progress. If this has ever happened to you, then there is more than likely one key thing you were forgetting to add to your budget. And that key thing is the biggest mistake you can make in personal finance.
The Elusive Unexpected Expense
As humans, we have an innate ability to convince ourselves that we can predict what’s going to happen in the future. Therefore, we approach our budgets or our spending plans a bit too optimistically sometimes – failing to account for unexpected events, assuming that they won’t happen.
Even when we find that unexpected events are eating away at our funds, we tell ourselves that it was a just a fluke, it won’t happen again, and the next month will be much smoother.
Unfortunately, we’d be wrong to think that. If there’s anything at all that is predictable, it’s that the unpredictable will happen. And the sooner you plan for unpredictability, the sooner you’ll have a budget that was successful both on paper and in real life.
How to Plan for Unexpected Expenses
If you’re already at the point in which you’re ready to plan for unexpected expenses, the next question might be something like this:
How am I supposed to plan for something that I don’t know is going to happen? Where would I even begin?
There are multiple answers to this question:
- You can start by building a general emergency fund
- You probably know more about the unexpected stuff than you realize
The first one is easy. Building an emergency fund means you’ll put aside money into a savings account that you’re only allowed to use in an emergency (a medical situation, a car breakdown, unexpected job loss, etc.).
There are a lot of opinions on just how much money one needs to have in their emergency fund, so you’ll have to go with your comfort zone on this one. However, a typical way of looking at it is saving for a certain amount of month’s worth of living expenses. If you don’t have a lot of extra room in your budget it may take awhile to build your emergency fund. They key thing is to save for your emergency fund every month and, once it’s fully funded, make sure you budget for filling it back up if you ever have to use any of it.
The second one is a bit harder. By its very nature, you would think that unexpected or unplanned expenses are things you don’t know about at all. But sometimes that’s not the case. Sometimes our unplanned expenses are actually expenses that occur quarterly or annually (rather than monthly), making it a bit too easy to forget to plan for them. You can fix that by determining how much you’d have to pay on those expenses if you were to be billed monthly and then set that money aside until you actually receive a bill.
You can predict other unexpected expenses by taking inventory on your past spending and your current living situation. For your past spending, as you review where you money has gone over the past year, you may discover unexpected expenses that repeatedly cropped up. Those should now be moved into your planned budgeting category. For your current living situation, you may be able to figure out the types of unexpected expenses that could soon crop up. For example, if your car has more than 150,000 miles on it, there’s a good chance you’ll need to start budgeting for a replacement (or at least repairs) soon. Or let’s say your furnace is more than 10 years old – it could be on its way out.
By examining the things you use daily, you might find that some unexpected expenses could be coming close to cropping up. And if you plan accordingly by setting money for those expenses into your emergency fund, then you won’t end up with a surprise and ruined budget for that month.
Find the Predictability Wherever You Can
The most empowered thing you can do for your finances is to prepare yourself for anything. Don’t let yourself get blindsided if you can help it – look for predictability whenever you can.
If an unexpected expense occurs, think about it for a few minutes. Has that particular expense ever happened? Is there anything you could have done to see it coming? Might it occur again?
When you ask yourself these questions, you’re taking a simple extra step to understand if you need to make some changes to your budget or spending plan. Then a one-time surprise doesn’t become a two- and three-time surprise.
Image Credit: Elizabeth Lies