Budgeting for the Unexpected

This is a guest post from my friend and personal finance blogger, Martilyo.

Hello Careful Cents readers!

My name is Johnathon “Martilyo” Allread and I am the writer of The Angry Millionaire, personal finance blog. Carrie was very nice to allow me to share an interesting observation I had, so thank you for reading.

“If something is unexpected, how can you budget for it?”

That would be my first reaction if I read the title of this post. My question is “how many things are really unexpected?”

This post stems from a Twitter conversation I was had with a fellow personal finance blogger.  He was trying to figure out how to budget for “unexpected car repairs, home repairs and health care expenses.”

 

Is the unexpected really unexpected?

Is there a such thing as an unexpected car repair?  Do you think that a car will run forever and never break down?  I would hope not!

I own a 1998 Honda Civic with almost 200K miles on it and I know it is just a matter of time before it breaks down on me.  Maybe the only “unexpected” part of this equation is not knowing that the car will break or not, but more so, when.

I currently rent the apartment I live in, however, I own an occupied rental property.  Up until this year, I really never had any major
issues with the property itself.

Come 2011, I had to repair a heat pump unit and replace a water heater.  I knew that the water heater was old when I bought the property in 2003.

So, again, it really wasn’t a matter of knowing whether it was going to fail or not, but more an issue of when. The heat pump, on the other hand, was less than 5 years old.  Did I expect it to have problems so soon?

No, however anything you own that is electrical, mechanical or a combination of both can be expected to be repaired or replaced at some point in time.

I would hope that you are not naive enough to think that you will never get hurt, or sick.  Once again, it is not a matter of if you will get hurt or sick, it is a matter of when.  (See a pattern starting to form?)

 

What really is unexpected?

Well I would like to think that the unexpected is something you had no way of knowing would happen. For example, your connecting flight was canceled.

Perhaps a couple who were told by their doctor that they would never have children, end up becoming pregnant.  Maybe the KGB…I mean, IRS found an error in your tax return and you end up owing money.

Your employer is closing it’s doors after being in business for 100 years and you are losing your job.  There are unexpected things that happen, but it is irresponsible to believe that you will never get sick, your car will run forever and your house will never need repair.

 

Poor planning creates emergencies.

A person’s financial well being would be much better if they lived by the Boy Scout motto, “Be Prepared.”  Since I had my financial “come to Jesus” meeting, I have recommended to everyone to have an emergency savings fund.

This could be a rewarding stocks and shares ISA or separate bank account, but this is generally a high-yield (no jokes please) savings account that, ideally, would contain approximately 3 to 6 months worth of living expenses.

Since I am currently in major debt, my emergency savings account contains a little over $1,000.00. This savings allows a financial “cushion”, so to speak, when an actual unexpected expense comes knocking on your door.

This will also be your “insurance” against having to use a credit card for an emergency expense.

As far as budgeting for repairs, maintenance and doctor visits go, I recommend budgeting a small “trickle” of money, based upon your own personal needs, every month or every payday into a car repair/replacement fund.

The same goes for a home repair and medical expenses. You can also create and budget for any expense that you may foresee in the future.

If you are like me and don’t want the administrative burden of having many separate savings accounts for different expenses, you can just combine the budgeted monies and place them into your emergency savings account.  You can always keep the budgeted totals separate on paper.

I have a saying, “the better you plan, the better you are.”  Are you planning for “the unexpected?”

Do you have an emergency savings fund? How do you budget for future expected expenses such as car/house repair or medical? What do you consider unexpected expenses?

To your financial health – Martilyo!

Photo Credit: 111 Emergency