It’s Always Something: Dealing with Unplanned Expenses

by Kevin on August 4, 2009

When I was growing up I picked up on a phrase my Dad used to always use: It’s always something.

Whenever something at the house would break, it’s always something.

Whenever something on the car needed fixing, it’s always something.

Every little unexpected or just simply annoying expense that popped up… it’s always something.

Thankfully my parents were wise enough to have some money set aside in the budget or their savings account to pay for these annoying somethings. I’m sure this is also where my father started instilling “Son, save ten percent of everything you make and you’ll be just fine.

On Friday we got to encounter one of our first real annoying somethings. I’ll tell you about it in more detail tomorrow, but today I wanted to share tactics to prepare for those things that just happen to pop up.

Save Up a General Emergency Fund

Many people see an emergency fund as the first line of defense against those expenses that pop up out of no where.

I look at it as the opposite. Yes, you need an emergency fund. It’s one of the key steps to my No Debt Plan.

But an emergency fund should be the last line of defense when something unexpected occurs. Again for many this is as far as they get — they build up the emergency fund and are so far in debt that it takes them years to get out.

So yes, build up an emergency fund. But there’s more you can do.

Identify Unexpected Problems

The easiest way for a problem to not be unexpected is to think ahead and expect it. Simple enough, right?

Not really. Our lives are really complicated. Here’s a quick list of things that could happen that would be annoying:

  • one or both of our cars could die or need a lot of expensive repair
  • one of our appliances (refrigerator, dishwasher, stove, washer, dryer, etc.) could need replacing or repair
  • I might leave a pen in a pair of pants, thus ruining a load of white laundry
  • our water heater, air conditioner, or heat pump could go out
  • I could drop my cell phone in a puddle

Just look at that simple list. That’s just a handful of things that could happen. Thousands of dollars are tied up in those five bullet points.

Yet this is a good process to go through. Open your eyes. Look around. What is getting up in years and may need replacing soon? Make your list and start thinking of what you would do if something needed to be replaced.

Create Emergency Funds for Each Category

Here’s the key!

You can’t possibly think of every single thing that might happen. Even if you could it would be so long it would be impossible to adequately prepare for each.

Instead I recommend lumping those expenses together into major categories. We only have two major categories: car maintenance and home maintenance. Each month we set aside a little bit of money into each category in anticipation of something requiring additional funds from us.

Do these little funds adequately cover us from everything? Absolutely not. But if you have $300 saved up and your water heater needs an $800 replacement you’ve taken a big chunk out of that $800 total. (And hey if you were lucky enough to go a long period of time without any major problems it might even cover all of that cost.)

Remember your emergency fund is the last line of defense. These little mini-funds are the first line of defense. If they get wiped out so be it, but hopefully they make a dent in the oncoming wave of unexpected costs.

I highly recommend you start putting a little bit of money aside each month into your major categories. Most people will need car and home maintenance. You might add medical costs in as well. I’m sure there are other things I’m not thinking of, too.

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{ 8 comments }

Wojciech K August 4, 2009 at 5:44 am

We’ve done something similar with saving for specific catastrophes, and it has saved us from having to pull money out of our main savings fund in the past.

We’ve also encountered exactly what you described, where the fund was not quite adequate, but it took care of most of the bill, so we were able to find the rest of the money elsewhere. It made dealing with the emergency a piece of cake.

Leigh August 4, 2009 at 7:20 am

I’ve been doing this for a couple of months now – using sinking funds to prepare for known or unknown future expenses. I use ING so it’s easy to do it all online and I can reallocate however I need to plus I have the automatic deposits made each time I get paid. The categories I’ve been using are:

Christmas (will have my first debt free one ever)
car insurance/repairs
car replacement
house maintenance/repairs
travel

Jason August 4, 2009 at 11:40 am

This is an interesting idea, although I am not sure I see the benefit. Why not simply keep the money in one single fund and pull when you need it. If you are just going to pull what you need form the main fund when you have an emergency why not just keep it all together to begin with and continue to add to it each month as you need.

Wojciech August 4, 2009 at 1:01 pm

Having it in separate funds makes it a piece of cake to budget. You can say “okay, I need $100 a month for cars, $50 a month to get Christmas gifts, etc.” When your car gets older, it’s easy to change the amount. If one area gets depleted, you can adjust.

It’s also easy to see how much you have avaialble for that purpose – so that your car money, for example, doesn’t pay for Christmas gifts.

I tried the single-account approach before and it simply became a mess. I didn’t know what was allocated for what and how much to contribute. I just had a “blob” of money sitting there. It’s hard to keep motivated that way with specific goals.

Now I still have a single account, but it’s separated into “envelopes” similar to ING sub-accounts.

Different strokes for different folks, I guess…do whatever works for you.

Kreestee August 4, 2009 at 2:48 pm

“It’s always something” – Roseanne Roseannadanna. Remember her from Saturday Night Live?

We do the same thing – cars (repair / registration / tickets – hopefully none of those), insurance, Christmas, etc. We have a car without air conditioning right now; thank goodness it’s the coolest summer on record here in Central Ohio or I’d have to raid my car fund to get it fixed. Maybe next summer it will be more of an issue, but I’m saving up for it now.

Since I’m in commissioned sales I also have a ‘sludge fund’ set aside for those few weeks I don’t hit my average sales. That allows us to stick to our budget, keep paying off the debt at the same rate, and not have to drastically cut everything while panicking til the next paycheck.

Jason August 5, 2009 at 6:18 am

Ahh, I can see the benefit when it is “optional” categories, like how much money to spend on Christmas. But in cases like a water heater breaking down you probably don’t have much of an option and you are going to spend what you need to spend to resolve the issue.

Or a Car if you need to buy a new car you will only spend what you have in that sub account, however if it is going to cost you $500 to fix your car it really doesn’t matter much what is in the car fund.

I suppose I can see the benefits in those cases.

Ashley August 5, 2009 at 3:56 pm

I like the idea of keeping them separate as opposed to being in one large account. It makes it a lot less likely that you will pull from specific accounts anymore than absolutely necessary. Kind of like breaking a $20 dollar bill.

I will try my darnedest not to break it, but once I do it’s all gone in the matter of a day. Personally, having specific sub-accounts/envelopes for each area creates a mental barrier in my mind to only spend what is in that one sub-account.

Of course if a car repair is $600 and I only have $500 saved in my car repair fund I will still need to get my car fixed. However, I would be more inclined to check out pricing at different locations or see if there was a way to get a discount than if I had one account with $3,000 to use at my discretion.

Kevin August 10, 2009 at 1:29 pm

@Wojciech K: Glad you’re on the same page.

@Leigh: Congrats on moving to your first debt-free Christmas! That’s awesome. Exactly the type of thing I’m talking about. Instead of saving up a big lump of money and saying, “Well a portion is for Christmas and a portion is for car maintenance…” … this makes it so much easier to differentiate what is where. Helps you identify the gaps better.

@Jason: (For your first comment): See the above comments! 🙂 It helps you easily identify where your gaps are and keeps you on pace each month for saving up for the expenses. I suppose you risk “over saving” but I’d rather do that than the other.

(For your second comment): True, but that’s why I keep a home maintenance fund. I’ve read you need to have 1-2% of the value of your home set aside for maintenance — water heater explodes, dish washer goes out, etc. Sure you might have two huge expenses land at the same time, but as with the other examples this is the first line of defense.

@Kreestee: Good luck with the car issue. We don’t do the exact same thing in terms of commissioned sales, but similar: we budget off of the lowest I think I would make (as in making any less would likely jeopardize my future with the company) and the rest goes straight into our saving plan (assuming there is more at the end of the month!).

@Ashley: Exactly. You are much less likely to dip into an individual fund than a general fund. Thanks for stopping by!

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