3005: Budget Busters How to Plan for Unexpected Expenses by Chelsea of Smart Money Mamas

[00:00:00] Have you ever noticed how a calm mind can really set the stage for a good night's sleep? That's the idea behind our new podcast, Good Sleep. Greg, our host from Optimal Relationships Daily, is here to help ease you into a peaceful night's rest with some positive affirmations. And these affirmations aren't just comforting. They can help ease anxiety and nurture positive thoughts, setting you up for true good sleep.

[00:00:25] So press play on Good Sleep Tonight, because a good tomorrow starts with a good night's sleep. Just search for Good Sleep in your podcast app, and be sure to pick the one from Optimal Living Daily. This is Optimal Finance Daily, Budget Busters How to Plan for Unexpected Expenses by Chelsea of SmartMoneyMamas.com

[00:00:50] There is nothing worse when you're working on keeping a budget than an unexpected expense. You think you're being responsible, you're even meal planning, and then the car needs new brakes and out comes the dreaded credit card. Back in debt when you thought you were being financially smart. And next, the spiral. For most people, the biggest problem is that once that credit card sneaks out of their wallet once, it becomes much easier for it to keep coming out.

[00:01:17] So how can you break the cycle? Learn how to plan for unexpected expenses. Luckily, the secret of how to plan for unexpected expenses is surprisingly simple. There are two types. Expenses you can predict, and expenses you can't predict. For the ones you can, start with an annual budget for that item. Then back into what you need to put aside every month to have the money readily available when your son grows out of his shoes again.

[00:01:46] For the expenses you can't predict, it's time to finally build that emergency fund. While it isn't the most exciting thing you will do in your life, building irregular expenses into your budget is one of the pillars of creating a budget that works long term. I've written before about my compulsive saver personality, but having a robust budget actually helps me spend. Instead of having a complete meltdown when our HVAC system died five months after we bought our home, I wrote a check.

[00:02:16] That was what the money in the home maintenance budget was there for. The unexpected expense became an annoying bump in the road, but it didn't ruin my summer. Remember, know what you know, considering irregular expenses. Every single year, the excise tax on daddy fish and my cars surprises me. Every freaking year. We used to live in a state that didn't have excise taxes on vehicles, and somehow I continue to block it out.

[00:02:45] It drives me nuts that I have to pay the state to own my car when there are tolls every 50 yards. But I digress. The truth is, most unexpected expenses are just like our excise tax. They aren't unexpected, just forgotten. The best way to plan for these expenses is to just take the time to think through your common expenses that may not happen monthly as you build your budget. Creating an annual budget.

[00:03:13] I'm a big fan of a flexible monthly budget. For budgeting to last long term, you need to be forgiving of the changes in spending that happen month to month. However, not all expenses get conveniently billed monthly. When you're initially setting up your budget, it's helpful to think through your annual expenses as well as your monthly ones. What necessary expenses happen every year, even if you don't know exactly when they'll hit?

[00:03:39] To get your mind working, I included some common budget busters in this post. From home to children, auto, health-related, and more. It can help you look back at old credit card statements for what you've spent on these things in the past. But if you're looking to turn over a new leaf, I would do some research on what you're willing to pay going forward. There's a lot of data out there on what Americans pay for different products and maintenance services.

[00:04:05] You can generally get a good sense of what is typical for your area and determine how that relates to your goals. For instance, the average American family spends $624 per year or $52 per month on clothing for older kids and teens, according to the University of Minnesota Extension. Affluent families pay $936 a year or $78 a month. Will you commit to only buying your children clothes at clearance sales,

[00:04:33] or do you plan to put your little one in designer jeans? Will your younger child largely wear hand-me-downs with a few new items? Setting your priorities on these expenses early on will help when your kids grow out of yet another set of clothes. Utilizing your annual budget. Once you know what you're willing to spend on your various irregular items each year, divide by 12 and review the monthly cost of these items.

[00:04:59] Make sure that you're still meeting your debt reduction and savings goals in your monthly budget with these added expenses. Even if they are necessities, you may need to circle back and find where you can limit the annual budgets a bit. After you're happy with where your monthly budget stands, including your categories for irregular expenses, start putting that money aside each month. Each month, you don't use the money in an irregular expense category. Just roll the value forward and let it build up.

[00:05:28] The app You Need a Budget is set up to do this automatically. And in free budget services like Mint, you can edit the category to roll balances forward as well. Once you have it set up, you have to be willing to have some grace with yourself. If you are two months into the process, it's unlikely any of your budget categories are ready for a major expense. When early on you suddenly need $400 for new tires when you only have $200 set aside for car maintenance,

[00:05:55] don't be afraid to pull from other categories where you aren't using the funds that month. Then replenish those categories with some of the money you would have allocated to car maintenance in the next months. Life happens! Just because your money is bucketed, it isn't written in stone. Know what you don't know. Planning for the unplannable. Annual budgets are all well and good, but what happens when an unexpected illness keeps you out of work for two weeks?

[00:06:22] Or your trusty car dies and it'll cost more money to fix than replace? Unfortunately, we can't see the future. Otherwise, we would all be much richer. We are also just flawed. There will be some expenses that regularly happen that we forget to plan for. That's why you need an emergency fund. An emergency fund is your financial life jacket. It keeps you from sinking into debt just because you didn't budget for something. It's easier, cheaper, and faster to replenish an emergency fund

[00:06:51] than to pay down credit card debt for an unexpected expense. The average APR for a credit card as of September 2016 was 13.8%. Cash back cards have an average of 20.9%. I don't know about you, but I would rather put a little bit of money away for an emergency than spend months lining a credit card company's pockets with high interest payments. If you don't have an emergency fund now, I would make it a priority in your budget.

[00:07:20] I recommend a minimum of $1,000 if you have other debt before aggressively paying that debt down, then at least $3,000 or three months of expenses after that. This should be enough to cover most major expenses and protect you from broader money issues. Protect your wallet, expecting the unexpected. With a robust monthly budget that accounts for irregular annual expenses and a solid emergency fund,

[00:07:47] you will have finally broken the paycheck-to-paycheck cycle. That extra monthly cost once in a while may be annoying, but the annoyance won't stay with you for months on end. When you know your expenses are planned for and you're protected from financial potholes in the road, your budget will finally feel freeing instead of restricting. And if setting up this system seems difficult, remember Nelson Mandela's wise words, it always seems impossible until it's done.

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[00:10:42] Rocketmoney.com slash OFD. What a great reminder from Chelsea of the freedom that comes with having an emergency fund for unexpected expenses. While certain expenses do seem to hit you out of nowhere, we all know they are lurking in our unseen future. So in a way, we can expect the unexpected. You can plan for the unexpected with an emergency fund.

[00:11:08] And not feel bad about paying for the surprise vet visit or new car battery, because this is in your budget in the form of an emergency fund. I've read a lot about sinking funds for future expenses. So for example, a car maintenance fund or a house maintenance fund. But personally, I've just always kept a stash of money in a savings account to pay for whatever might come up.

[00:11:30] I've thought about using a service like Cube Money or Simple Bank or even You Need a Budget to organize my money a little better and have clear short-term savings goals rather than lumping it all together. I think if the gap between your income and expenses is relatively small, these tools can be incredibly helpful to bring hyper-awareness into where your money is going and giving every single dollar a job even before it hits your bank account.

[00:11:57] Also, I think a budget is only as useful as how much you engage with it. You should be reviewing it at least once per month to see how you're tracking against your budget and to see if you need to make any adjustments. Remember, money is only as valuable as your clarity on how you will use it and your comfort level with how much is enough. So that's a wrap for another edition of Optimal Finance Daily. Have a great rest of your day and I'll see you back here tomorrow where your optimal life awaits.