According to the Greek philosopher Heraclitus, “The only constant in life is change.” Sometimes change is for the better, other times it can lead to financial difficulties. While predicting the future is the province of online psychics, saving for unplanned expenses can help make financial challenges easier to manage.
So, how does one plan for the unexpected?
Develop and Adhere to a Spending Plan
Do you understand the difference between a budget and a spending plan? A budget establishes the parameters within which you will not spend money. A spending plan establishes the parameters within which you will. They both amount to the same thing in the end. But the former feels liberating while the latter can feel restrictive.
The best way to craft a realistic spending blueprint is to total up the cash you have spent on bills over the past year. Look for ways to direct your money more effectively such as minimizing frivolous expenditures. Use that newfound money to save and invest.
Establish an Emergency Fund
While your first impulse might be to borrow money when an unplanned expense pops up, establishing an emergency fund beforehand is a better way to go. Even if it doesn’t contain enough cash to cover the entire expense, you will still incur that much less debt.
Experts recommend setting that cash aside in a separate savings account, using automatic deposits to keep it funded. Common wisdom suggests having an amount that covers at least three to six months of your household expenses (including rent/mortgage payments). But if you don’t have the means to save that much, any amount is better than nothing.
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Use the Money in Your Closet
You probably have piles of clothing and racks of shoes that you no longer wear languishing in your closet. Similarly, your garage and/or your attic or storage space are probably packed with items you no longer use but haven’t gotten around to letting go.
But consider this—everything you see in those spaces used to be money. That’s right, we’ve traded money to acquire everything we have. When it no longer serves us, the smart thing to do is convert it back into money.
Websites such as eBay, Craigslist, and Facebook offer up ready marketplaces you can use for this purpose. Set aside the cash you collect in a much better place — your savings account. By selling your items soon, you can have cash available to cover an unexpected expense. A less cluttered closet doesn’t hurt either.
Prepare for the Predictable
Sometimes an unplanned expense is actually an overlooked cost. If your stove, refrigerator, water heater, or furnace malfunctions at some point, you are facing a costly repair or exorbitant replacement. Ditto for your car. Get into the habit of setting some cash aside for those eventualities.
Working this into your spending plan will make it easier to save on a continual basis. Even if it’s just a small amount each month, stashing it in a high-yield savings account can help it grow over time. Then, instead of going into debt to buy a new refrigerator, you can draw from that fund. Again, even if there’s not enough money to cover the entire expense, you’ll take on less debt to deal with it.
In Summary
Planning for unplanned expenses can make the difference between weathering an unexpected financial storm with cash or diving into debt to resolve it. Far too many people look upon their credit cards as the source to handle emergencies. And yes, that will work. But it’s far more expensive in the long run.
