Life does not happen on schedule or according to plan. However, one thing we can be certain of in life is that things will happen. And they will cost money.
If you own a car, I guarantee you will pay for car repairs and maintenance. Your tires wear out, brakes need to be replaced, and power locks fail. Can I tell you exactly how much that will cost or exactly when the expense will occur? No. But I know that it will.
The same goes for home maintenance and repair. If you own a home, at some point you will have to repair or replace your furnace, dishwasher, garbage disposal, garage door opener, fridge, etc. Carpets, roofs, paint, and appliances wear out over time.
Do you have a body? Chances are that body will get sick or injured at some point and need to see a doctor. If you have kids, you will probably have to see doctors more often than you like. (Kids are little germ monsters and accidents waiting to happen!)
The first step towards a more secure future is to set up an emergency fund. This gives you a buffer against the unexpected. However, if you find yourself needing to dip into your emergency fund frequently, chances are your monthly budget needs an overhaul. You have forgotten to plan for the infrequent but expected expenses of life.
Examples of these items:
- Semi-annual or annual insurance premiums or taxes
- Car repairs/maintenance
- Home repairs/maintenance
- Medical costs
- Eye exams/contacts/glasses
- New computer/phone
- Dental work
- Gifts (birthday/holidays)
So, what do you do?
My favorite financial advice is to pay every bill, every month. When I say “bill” I don’t mean just the phone bill, electric bill, rent, etc. I mean you calculate out the monthly cost of all bills and other expenses and put aside money each month to cover that. If your annual life insurance premium is $436, then each month you need to put $36.33 aside so you have the money ready for the premium when it is due.
If you own a home, the rule of thumb is to plan on spending 1% – 2% of your home’s value for maintenance and basic repairs. If you own a $250,000 home, that’s about $208 – $416 a month. For car repairs, you find online estimator tools that estimate the cost of owning your vehicle and will give you a starting point to estimate how much to put aside.
If you tend to go overboard at Christmas and birthdays, you will especially want to make sure your gift/holiday budget is addressed. One of my friends is really into holidays, birthday parties and gifts. She has two kids and spends around $250 on each child’s birthday party each year. For Christmas, she likes to go all out on gifts and averages around $1,000 for gifts. During the year, for various friends and family members birthdays, anniversaries, weddings, baby showers, etc., she spends around $80 a month on gifts. In order to pay this bill each month, she needs to save an average of $205 per month.
Open a savings account (or two … or five)
Ok, let’s assume you’ve gone through your budget and identified holes where you need to start putting money aside for the expected but infrequent expenses that life throws your way. You’ve estimated the amount to put aside – now what do you do?
I keep my money for these expected, but not yet incurred expenses, in a savings account. I have an automated transfer each month for the amount that is being saved. If I need to spend money for that category in that month, I can adjust the transfer or withdraw from the savings account as needed. For example, let’s say you are my friend with a gift/holiday habit. You have an automatic transfer on the first of the month to move $205 to savings to fund your gift-giving. Then you get invited to a birthday party and need to spend $30 on a gift. Since the transfer has already occurred, you simply withdraw $30 from the savings account.
Because I am a nerd and I like to quickly track how much money I have in savings for various items, I like to keep my money in separate savings accounts. I have one for car repairs/maintenance, one for my house, one for gifts/holidays, one for insurance premiums, one for medical/dental, and one for big purchases (this lumps clothes, new computer, new phone, etc. together). Whatever makes sense to you is the best way to handle it. The important part is that you have worked money for these things into your regular budget and no longer need to dip into the emergency fund regularly for items that you are able to anticipate.
As I said, the advice is to pay every bill, every month. Analyze at your budget and find the holes where there are expected, but infrequent, expenses that you do not currently capture. Set up a savings account, and start putting money aside each month to cover these expenses. You will find that your life has fewer money emergencies, your stress level related to money issues drops, and you can withdraw and spend money on these expected unexpected items guilt-free. Take control of your money!