In life’s many endeavors, there are usually roadblocks or “critical flaws” that prevent us from achieving our goals. In the world of budgeting, that critical flaw has to be the lack of planning for “unexpected” expenses.
The irony with unexpected expenses is that, although they are sporadic when looking at specific categories, they are remarkably predictable when taken as a whole.
Month after month, you can expect to spend a certain amount on expenses you could not have predicted, although the amount and preparation for these costs can and should be controlled. That’s why each month, we set aside money for these unexpected items.
Likewise, there are budget categories in life where sooner or later, money will be spent. It may be $500 on a repair this month, and $400 on a new product next month. Over the course of the year, we can average out and prepare for these expenses.
I can think of four such budget categories. Consider the following:
Expense 1: Auto Repairs
Auto repair costs, or at least “reasonable maximum costs” can be predicted with relative accuracy based on the age of your vehicles and whether warranties continue to be in effect.
For my 8-year old car, I expect to spend up to $1,500-$2,000 on repairs and regular maintenance, and would like my car to make it beyond 100,000 miles.
For my wife’s 3-year old car, the number is much smaller, perhaps $500 per year for things like tires and oil changes, although with the warranty now expired, we’ll need to re-consider this amount.
Expense 2: Gifts
When was the last time you said to yourself – “No, I can’t buy that gift, we can’t afford it!” While cutting costs for yourself seems easy, our nature to please others sometimes prevents us from holding back on our gift budgets.
This category rarely makes it into a budget in the first place, because gifts are so sporadic and the expense can be unpredictable.
That’s precisely why people go into debt buying Christmas presents – they haven’t considered and prepared for them throughout the year.
Expense 3: Broken Tools, Appliances or Electronics
The reality of life is that things break. They do so frequently, often in bunches, when we least expect it, and at the most inopportune time.
That’s why it’s very important to be prepared for the replacement cost of appliances, tools, or electronics we own.
Consider the lifespan of a typical laptop – 3 to 5 years, perhaps. Are you prepared to purchase a new computer once your current one breaks down? How about the other appliances in your home?
Expense 4: Health Care
Like all of the above expenses, health care can be an unpredictable expense, even when considering the relative “protection” provided by health insurance.
Expenses that must be covered are deductibles, preventative or elective care, vitamins and minerals, and prescription costs. Are you ready for these to creep up at any time?
Your body doesn’t know if you’re short on money this month – it will get sick and need care regardless of how prepared you are.
I’m Armed with Information – Now What?
Being armed with the knowledge that you should be prepared for any of the above four budget-killers is step one in establishing a successful financial plan.
Step two involves creating a specific system to address the financial resources required to fulfill these expenses without using credit. The easiest way to accomplish this is by using a dedicated irregular expense fund.
You can treat irregular expenses as a single block, or save individually for specific budget categories. What’s important is that you’ve addressed the expectation that these expenses will arrivem, and have eliminated the surprise factor from your financial life.
What a peaceful feeling that can be!
Photo by DjLicious
Fiscal Fizzle 
And when the unexpected happens it does in groups. My car needed repair, my puppy needed to go to the emergency vet and my thermostat stopped working, all happen within two weeks from each other. It would help to budget for the unexpected.
Thanks for the useful tips…
Great post. I posted on emergency funds I guess 5 or more times. Murphy comes to visit us all and we best be prepared or we will remain dependent on credit cards. Having the $1000 emergency fund recommended by Dave Ramsey is the FIRST step any wise person make regarding their money.
Thank you both! I think the theme is that we can never be too prepared…even if it seems like things are running fine, keep on saving. Good upkeep of our tools/health/assets is certainly a start, but sooner or later all things will catch up with their lifespan and we need to splurge to keep functioning.
It’s hard to think that way when times are great and everything works just fine, but when things go bad…hindsight kicks in. 🙂
For most of us, probably auto repairs is the most important hence why we need an emergency fund.
My dad just did maintenance, unexpected on the car and I split the cost for it with him. thank goodness I had an emergency fund.
But it only goes to show me that 1000 saved up is just not enough, at least for me.
Next would come electronics such as laptop or any computer hardware since I do a lot of work using computers. This would include funds for a replacement laptop, internet connection, printer and/or cartridges, shredder, etc.
Health care is not a big issue for me because I haven’t been sick in a very long time but I would still say it is good to have a few hundred bucks saved up.
Either way, I really appreciate you putting together this lost, it got me thinking more about unexpected costs.
Tom – All very good points! The nice thing about an unexpected expense fund is that is overlaps in many ways with an emergency fund, so you’re not really “adding” unexpected expenses to your budget, as much as merging it with your current emergency fund savings. I have both in any case, since some expenses are still unforeseen, but since starting my unexpected fund, I don’t put as much away for emergencies.
I see your point about health care – we’re both young and sometimes it feels like we rarely get sick. Although I hope that’s always the case, I know that as I get older, medical expenses will rise as my body needs more maintenance. If anything, I’m just saving ahead for that eventual expense so that the financial shock is not as great.
Thanks for stopping by.
Good points. You’re darn right that most of these are not “unexpected” expenses. Only to those who don’t plan for them! Note how some of these (health care) are essentials while others (gifts) can be good areas to frugal-up on.
You’re absolutely right! In fact, since we’ve started saving for all of these, we’ve noticed that we spend less on gifts overall, simply because we don’t want to let all that saved up money go into a non-essential. We’ve started to “skim” the gift pot and move the money to other needs.
Good post. I’ve been using a similar system for a few years; my annual bills fund. I work out approximately how much irregular expenses like car repairs, insurance renewals, and other irregular items are likely to be for the year, based on previous years, add a bit for the unexpected, and then set up a direct debit to an annual bills fund within my mortgage offset account. Then I just transfer back whatever is needed when these bills come up. I treat saving up for items like cars or home improvements separately. As this account is specifically for money to be spent, it is also much less demoralising than having to raid a true savings account!
PF
I never really sat down to think of exactly what my “unexpected” expenses were every month. I just put $500/month, which I think is well beyond what I would usually spend, but any extra goes into savings so I think it’s a good round number.
The program You need a budget has been amazing in helping me feel I have a grip on finances now and saving for these unexpected expenses.
Thanks for the list.