How Do You Budget for the Unexpected?

So, you’ve built a budget. You’ve taken a colossal first step toward a successful financial life. And then the unthinkable happens – you’re hit with a huge unexpected expense.

If you’re going through this right now, your head might be spinning. It’s incredibly frustrating to feel like you’ve just started to get your financial life on track, only to have it derailed by something you couldn’t have possibly predicted. In the moment, unexpected expenses feel like a personal attack on your financial wellbeing.

We often view them as something that’s happening to us that was completely beyond our control. However, in most cases, we likely could have seen the “unexpected” expense coming if we’d thought ahead; or, at the very least, we could have planned for true emergencies with targeted savings. Let’s talk about how you can start expecting the unexpected and budget accordingly.

Insure the Insurable

We won’t go into detail here – it’s not the focus of this blog post. But, please, make sure you’re properly insured (Property and Casualty, Life, Health, and Disability). Transferring your financial risk to insurance companies, albeit for a cost (insurance premiums) is in your best interest.

Evaluate Your Expenses

It might be true that some of your unexpected expenses aren’t quite as unexpected as you may have thought. Many people view unexpected expenses as:

  • Replacing (or repairing) a car that looks like it could break down soon
  • Medical expenses for your kids
  • Home repairs

While these expenses aren’t frequent, they’re also predictable. You may not know when your fridge or older vehicle will break down, and you may not know when your kids are going to trip and need stitches. But if you’re honest with yourself, you know these expenses are going to crop up. However, many people forget to include them in their budget, often because it’s difficult to budget for an expense that doesn’t fall neatly within a timetable.

Get Proactive

Some of your expenses, on the other hand, may be honestly unexpected. It’s tough to prepare for a car accident, travel arrangements for a death in the family, or ongoing medical complications for you or your immediate family. This is where some proactive planning can be helpful. This process is brief, and can save you financial headaches down the line:

  1. Pull your bank statements from the last year. What expenses were unexpected, or posed a financial burden? Highlight them or jot them down.
  2. Think back through the past several years, what other large expenses stick out. Did you have to replace your vehicle when yours broke down? Was there a large hospital bill after an accident?
  3. Look ahead to the next few months or years to come – what expenses might come up? Does your fridge make a constant whirring sound that doesn’t bode well? Did your young son just figure out how to climb trees? Nobody likes thinking about a worst-case-scenario, but when it comes to your money you should always hope for the best and prepare for the worst.
  4. Start to think through how you can prepare for these expenses in the future, and when they’ll likely crop up again. For example, if you recently replaced your vehicle you may not have to do so again in the near future (barring an accident). Some big expenses pop up every few years, while others are more closely related to a season of life. Young kids, for example, often have higher medical bills than adults, which is something to consider as you enter parenthood.

Once you have a list of large potential expenses you may be staring down in the near future, you can adjust your emergency savings goals accordingly to prepare in advance.

Emergency Savings are Important

The NewLeaf Financial Guidance blog covers savings often – and for good reason. An emergency savings is a necessary component of every financial plan. Your emergency savings should be between 3-6 months of living expenses to prevent going into debt in case of job loss, injury, or other true emergencies. If you don’t have any form of emergency savings yet, starting with a more incremental goal of $1,000 in an emergency savings account is an excellent first step. Keep in mind that your emergency savings should be in an accessible cash savings account, not in an investment account (like a Roth IRA).

In many cases, one large medical bill is enough to send an American household into debt. Being in this kind of precarious financial situation is draining, both on your finances in the event of an emergency and on your health. Emergency savings can reduce the stress you feel day-to-day, insulate you financially, and help to promote good personal choices (like going to the hospital if you get hurt rather than sticking it out because you can’t afford it).