Surprise Expenses

Are you thinking about these scenarios?

When putting together a budget and establishing your financial plan for the future, there are many factors to consider. After all, a budget doesn’t only account for your monthly expenses, but your goals as well, even if they aren’t yet within financial reach.

For example, purchasing a home or a new vehicle might be something you are planning to do down the road. By putting it in your budget now you can prepare, lay the groundwork and map out your finances accordingly.

But, what about those expenses that come as a surprise? While it might seem like planning for the unexpected is a bit trickier, it is still something you should be doing.

Understand that surprise expenses happen

While your budget might be your financial guide, it’s important to remember that life doesn’t necessarily follow the rules of your budget. In other words, you may have a limit on certain expenses, but life doesn't check these costs with you first.

A commonly referenced example is a medical emergency. You may be perfectly healthy, so it's extremely unlikely that you're thinking about something going wrong. It is also important to note that medical emergencies do not have to be limited to you or loved ones. Are you a pet owner? While it’s never pleasant to think about, pets have medical emergencies as well.

If something goes wrong, whether a medical emergency or a failing transmission on your car, you want to be in a position where you can seek the help you need without putting your financial standing at risk. Or, to be more clear, an unexpected expense should not derail your financial planning efforts.

You should be able to handle surprise expenses while also being able to continue saving for your goals. Simply put, this means accepting that surprise expenses will arise, and having a plan in place to set a certain amount aside each paycheck so you are prepared for them.

Build your emergency fund

You’ve heard it before, but there is no better time to start an emergency fund than right now. Having this fund in place provides a cushion for you and helps to prevent an unexpected event from draining your savings or upending your lifestyle. Emergencies and surprise expenses as a result of a disaster or accident do enough damage on their own without having to break your bank as well.

And when it comes to your emergency fund, remember that there’s a difference between an emergency and a minor surprise expense. For instance, if a friend of yours is moving into a new home and is having a housewarming party, this may come as a surprise to you, but purchasing a gift for this friend should not be classified as an emergency. Make sure to keep your allocations separate so you will have the proper funds when you need them.

Consider what can go wrong

There are many expenses you are responsible for on a daily, weekly, monthly or annual basis. However, even a planned expense comes with some room for error. And these are usually affiliated with your big-ticket purchase items.

If you’re a homeowner then you likely have a monthly mortgage payment, but this monthly amount shouldn’t be all you are budgeting for when it comes to housing costs. What if a pipe bursts? Or what if you realize you have a leak in your roof and without an immediate fix this could cost you a significant amount of money down the road?

The same can be true for other major expenses as well, such as a vehicle. If and when something goes wrong, you do not want to dip into your life savings (money that should be saved for retirement) or another significant savings account (future college?) to fix it. Additionally, you want to avoid going into debt to prevent the problem from getting worse.

If you have expenses such as a home or automobile, make sure you have respective funds in place for each of those items. If there is room for something to go wrong, it’s better to plan for it than hope it doesn’t. After all, if you have money set aside for a home emergency and that home emergency never happens, then you have not lost anything, just increased your savings.

Think about insurance where necessary

When it comes to planning ahead for surprise expenses, saving and building an emergency fund is not your only option. There are certainly instances that might be more expensive than an out-of-savings amount can handle, which is why you should take a serious look at your insurance options.

If you’re young, you might not be considering the aspects of insurance and the ways it can be beneficial to you or your loved ones. Concepts like obtaining a life insurance policy might seem far off. But there are many forms of insurance to consider, from homeowners insurance to automobile insurance.

Even as a renter you can secure a renters insurance policy to protect the assets you currently own. And yes, if you own anything, then you have assets. It is a common misconception that only large purchases like homes are worth value. If you own items, whatever they might be, then you have assets worth value. Don’t make the mistake of thinking they aren’t worth protecting.

It is likely that some of these insurance-related costs are required, depending on your situation, but selecting the right insurance policy is more than a "yes" or "no" option. Consider your needs, take your time when looking through policies and select what makes sense for you and your lifestyle.

Adapt to changing circumstances

Surprise expenses do not always stem from a sudden medical operation or a problem with your car. Even your everyday expenses that you currently have under control could become unexpected.

For example, if someone in your household loses a job, the financial load would no longer be carried evenly, as another member of the household might now be paying for items they were not before. This creates a situation where even though these costs were considered and planned for, they are now a surprise to someone else and the plan needs to be adjusted.

And since surprise expenses can come in any shape or size, there is no better plan of attack than creating and building your emergency fund. There are other options you can use to protect yourself where necessary, such as insurance, but having an emergency fund keeps you in better control of your finances regardless of what life might throw your way.

Start your budgeting process so you can build your emergency fund today.

Want help planning? Schedule an appointment to meet with someone at an Associated Bank near you.

Sources:

“Tips for Financially Preparing for Unexpected Events,” The Balance, November 2020

https://www.thebalance.com/planning-for-financial-emergencies-2385813

“6 Types of Unexpected Expenses and How to Plan for Them,” Money Crashers

https://www.moneycrashers.com/types-unexpected-expenses-plan/

“Planning for Unexpected Expenses,” MoneyFit

https://moneyfit.org/blog/planning-for-unexpected-expenses

“Preparing for Financial Emergencies and Unexpected Expenses,” The College Investor, January 2020

https://thecollegeinvestor.com/1790/preparing-for-financial-emergencies-unexpected-expenses/