It’s just a matter of time before unexpected expenses pop up in life. The transmission blows on your car right around the time your daughter needs braces and your washing machine decides to call it quits. All of these are unexpected expenses and something we need to deal with throughout life.
Being prepared as much as you can is your best bet when life throws you a financial curve ball with unexpected expenses.
What are some examples unexpected expenses?
Truly unexpected expenses are the result of events like losing your job or getting struck by a massive, out-of-the-norm health-related bill that insurance won’t cover.
Unexpected expenses can also include things like taxes, repairs to major appliances, doctor bills, gifts, repairs to your home,… you get the idea.
How much should I budget for unexpected expenses?
They say to budget three months salary if you lose your job. Ideally for unexpected expenses you want to have savings above and beyond that number.
After saving up to three months income you want to be putting away 10-percent of what you bring home each month and have it tucked away for unexpected expenses.
Create an emergency Fund
An emergency fund is an account for funds set aside in case of unexpected expenses from things such as the loss of a job, a debilitating illness or a major repair to your home.
Set up a savings account and add ten-percent of your income to it monthly. Use it only for completely unexpected expenses. Make sure you know what’s in the account. And once you have to take money out of it replace it as quickly as possible.
Cut the Fat from Your Budget
Go over your budget and see if you can temporarily cut back on some things. For example, stop ordering pizza every Friday night and make your own at home. Skip a night out on the town and watch a couple of movies on Netflix instead of going to the theatre.
Use the money you’re not spending to fill or refill your emergency fund in preparation for unexpected expenses. For an extra boost, work a few hours of overtime, do a few freelance projects or temporarily pick up a part time job to get back on track fast.
Anticipate upcoming expenses
When you are on a tight budget, unexpected expenses can be a huge problem. Do your best to anticipate upcoming expenses. If you’re driving an older car, or your dishwasher has seen its better days, start saving up to replace the item. You may also want to start keeping an eye out for good deals on the replacement.
Build Good Credit
What do you do when an unexpected expense comes up before you’ve had a chance to set up the emergency fund?
First, take a deep breath and assess the situation. Can you make do without the item for a little while? Just long enough to scrape together the funds to repair or replace it. If it’s the dishwasher, that’s easy. You can wash dishes by hand for a little while. If it’s the fridge or the car you rely on to get you to work each day, that’s a different story.
If you need the item that broke, evaluate if it would be less expensive to repair than replace. Even if it isn’t the perfect solution, it may get the job done until you can save up. Shuffle your money around and if there is no other option charge it to the credit card and get to work. Your one and only goal right now is to pay off that expense. If you stick every penny of discretional income in, it won’t take you long.
Once your bills and credit cards are paid off, do what you can to get that emergency fund set up. Because you know something else will break down the road.