They say life is full of surprises. Although typically joyous in nature, you may feel differently when it comes to your finances. A routine review of income and expenses may help you curate your financial portfolio and allow you to delegate what funds go where. However, what do you do when life throws you an unexpected expense?
Determine if it is an unexpected expense or an overlooked one.
To understand your finances, you need to see the whole picture. Use the prior year as a cheat sheet! Comb through your year of expenses to help identify regular expenses, irregular (or overlooked) expenses, and unexpected expenses.
Regular expenses are your recurring payments such as rent/mortgage payment, a phone bill, or car insurance. These are predictable and are part of your normal monthly expenses.
Irregular (or overlooked) expenses can feel like they are unexpected, but if you reviewed the year prior, you would see that they are likely to occur. Examples in this category may include:
- Home Maintenance
- Car Maintenance (changing your oil, new tires)
- Children (school supplies, the last-minute notification of a field trip)
- Health (doctor copays, prescriptions, and medicine)
- Seasonal (events like Halloween, holiday shopping, summer vacations, landscaping)
- Memberships and subscriptions
- Gifts (birthdays, thank you items)
- Random (replacing a phone or computer, hobbies)
Unexpected expenses are truly…unexpected. Natural disasters, burglaries, accidents, and medical situations all fall under this category. With these events having no notice, how do you plan for them? Well, truth be told, it’s hard. But there are steps you can take. While it may seem trivial to prepare for stressful financial situations, preparation can actually help avoid some costs altogether.
Here are a few ways to prepare for the unexpected:
- Take care of your health to help mitigate potential unexpected medical problems. This includes staying active, making healthy food choices most of the time, and getting regular check-ups.
- Make sure you have insurance – for your health, your vehicle, and your home. Out-of-pocket medical costs can really add up. And if anything happens to your car or home, and you do not have the right insurance for your situation, repair costs come out of your personal wallet.
- Create an emergency fund as a first line of defense. The goal is to set aside 6 months’ worth of living expenses. That amount may feel unattainable but break it down into bite size amounts. Start small and build your emergency fund one month at a time.
- Build emergency funds by contributing bonuses or tax refunds. Lump sums can help you hit the ground running. Instead of using your entire bonus or refund on a “want”, put some of this money toward an emergency fund first.
- Finally, take advantage of time and create sinking funds! These are small amounts set aside for longer periods of time. This is a great tool to use for unexpected and irregular expenses. For example, let’s say you spent $500 on gifts around the holidays in 2023. This year, begin to set aside $50 (or $25 for bi-weekly paydays) each month. By the time December arrives, you will have your spending money ready without the stress!
Preparing for known or unknown future expenses takes discipline and commitment. When a financial need arises, you’ll be thankful you took the steps to prepare.
Want to read up on how to break free of living paycheck to paycheck? Click here.
Consult with a medical professional for health-related guidance.
