If I had all the money back from all the unexpected expenses that have popped up in my life, I’d be a rich woman. Just recently I had to fork over $500 to have my car repaired. That’s money that would have looked a hell of a lot better in my investment accounts.
It’s frustrating, but life happens to us all, and sometimes it costs money to fix it. Unexpected expenses get us all. Luckily, you can factor those sons of guns into your budget. That’s right: you can expect an unexpected expense.
Knowing that life will sucker punch you at some point is oddly reassuring. You might not know when it’ll happen or how much it’ll cost, but you know that it will happen.
And, you might be able to predict an emergency. For me, I know that I drive what amounts to a toy car. I got it used several years ago, and it simply wasn’t built to last the ages. I know what the problem areas are, and I can estimate the repairs based on previous repairs.
Using this information I can set aside money in advance to pay for the repairs. That way, when it inevitably happens, I’ll have the cash on hand to pay for it. I won’t have to go into debt, and it won’t be a huge blow to my monthly expenses.
Since you are also a financial badass, you can do the same thing. Here are the ways that anyone can budget for an unexpected expense.
The emergency fund is like the little black dress of the personal finance world. Everyone needs one and it never lets you down. How did I pay that unexpected $500 bill? By dipping into my emergency fund.
An emergency fund is a pile of money you keep readily available in case of emergencies. Suddenly need to move? Emergency fund. Random health expense? Emergency fund.
Key thing here y’all: emergency funds are not for last minute plane tickets that are a really good deal, or to cover your impulse shopping at Whole Foods. Those are not emergencies. They may be intense cravings, but you will survive without them. Emergency funds are for when the shit hits the fan, or you have no other way to pay for an immediate need.
Bravely recommends that you have a minimum of three months living expenses in your emergency fund at all times. This gives you peace of mind and breathing room should you lose all your sources of income in one fell swoop. Knowing you have money for food and rent while job searching is a huge load off your shoulders.
While three months is the minimum, you can and should build a bigger one as time goes on. Particularly those with dependents, a chronic illness, or who are financially unstable, since a financial emergency can have a deeper impact on your life. I personally keep eight months worth of living expenses in my emergency fund.
There are some expenses that are not monthly. Insurance payments or safety deposits are good examples. These still need to be paid, but since they aren’t on our monthly expense sheet we can easily forget about them. I felt blind-sided by my bi-annual car insurance payments for years before I got my act together and started to plan for them.
A bi-annual expense account is the answer. How does this differ from an emergency fund? Two key ways: this is for expected expenses, and you should be able to pinpoint a specific number for the account.
Since you know these expenses are coming you should know how much they’ll cost. Make a list of all the bi-annual, or semi-annual expenses you have. Divide the number by six and set aside that much each month. When it comes time to pay the piper, you’ll have the exact amount you need in savings. No need to put an expense on a credit card last minute!
As I have learned over the past few years, you can be the world’s best planner and things will still go awry. You can save up three months worth of living expenses and then need four. There is no guarantee. But it’ a hell of a lot better to have savings there waiting for you than to be caught with your pants down and your financial ass exposed.