Tuesday, April 21, 2015

Budgeting for Life's Little Emergencies


What if I told you I had a way to pay for your car breaking down?  Or the clothes dryer dying?  Or all of your doctor's appointments for the year?  You'd probably want to know who was supplying me with my money.

It's me.  Present me.  Giving a gift to future me.  So when the car breaks down, my finances won't go into a tail spin.  When I have a doctor's appointment, I'm ready to pay for all my out of pocket costs without sacrificing any funds I had set aside for investments.  I do this by budgeting small amounts monthly for the inevitable problems and their associated costs that life has a way of throwing at us.

Let's look at some examples.

Household Appliances

Major household appliances generally have a lifespan of 10-15 years.  Let's use a refrigerator as our example, and we'll stick with ten years to be conservative.  We'll say that an average fridge costs about $1,200.  So from the time you get your new refrigerator in your home, you'll need $1,200 in ten years. This means that if you save $10, you'll be ready when the time comes. Ten dollars a month is so much more manageable than $1,200 at once.  (Feel free to alter the numbers depending on your taste in refrigerators and your comfort level with the ten year number.)

Cars

Cars can get expensive, especially when they need repairs.  Those repair jobs can pop up out of nowhere and send your budget for a dive.  Start by deciding on the absolute most you're willing to spend on fixing up your car.  If you spend anymore than this number, you think it's worth it to just get a new one.  Then, set a time frame for saving up that amount of money.  Maybe you can contribute $50/month or maybe you can contribute $200.  Once you've reached that savings goal, you don't have to allot any more money to it.  Just replenish it after any maintenance or other repairs so that you're ready for the next time.  (With older cars you may want to build this account up more aggressively as the odds you'll run into trouble is higher.  That being said, the absolute most you're willing to spend on it may be lower, as well, so you may be able to reach your goal faster.)

Health Costs

Saving for health related costs is a smart idea, too.  If I knew I was responsible for 25% of my doctor's bills, I'd try to calculate how many times I needed to go for routine check ups and tests.  This will vary based on my age and any medical conditions I have.  Then I'd factor in getting sick or injured a few to many times a year accounting for my lifestyle and comfort level for risk.  I'd take all those costs (25% of the bill) and then divide it by twelve.  The first year you won't be in a good spot if you have an unexpected illness in the first part of the year, but if you have any leftover at the end of the year you can roll it into the next one, making the amount you have to save in year two a bit lower.

If your health care costs are 100%, the good news is you're covered for emergencies already, and can hopefully reach other savings goals more quickly that if you had to pay a percentage.

Isn't This What Emergency Funds are For?

Yes.  All of these things could fall under a general emergency fund.  But they're expenses you can predict with a certain amount of confidence.  When you are prepared for the inevitable, it allows you to free up your emergency fund for situations like job loss, a death in the family, a sudden move, or a change in family dynamics, all of which cannot be readily predicted.

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