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