By: K.H. Smith
Finance bloggers and experts talk a lot about creating an emergency fund for those unexpected expenses. And that is still a necessity. However, there are big expenses that come up that you know are coming. Things such as major car repairs, needing a new car, house maintenance items like a roof, furnace, or appliance replacements, etc. are expected expenses that you know are coming. Don’t forget about birthdays, Christmas and graduation presents. These items should not cut into your emergency fund. They should be planned for in advance and paid for in cash if possible. The question is how do you go about that?
I recommend taking a(nother) hard look at your budget. Don’t have a budget? Here (link) is how to start one. How much discretionary or extra income do you have each month? That is money left over once all your obligations are paid. Once you have determined that amount, you need to divide that money amongst your goals. Adding in a category for expected expenses is a great idea for your financial goals this year and going forward. This prevents you from tapping into your emergency fund, using your credit card, or worse needing a loan to pay for these expenses.
Depending on the size of the expected expense and approximately how long until you need it, lets you figure out your budgeted amount for each month. You may be funding multiple upcoming expenses at the same time. Right now, we are saving for a new hot water heater and a new septic field. We know that most of our savings is for the bigger item, the septic, and a smaller amount is allocated for the hot water heater. It is okay to put them all in the same savings account, just make sure you know about how much is saved for each. This should be a separate savings account than your emergency account. I personally have 3 savings accounts. I have a regular savings account, an emergency fund account, AND one for expected expenses. My credit union doesn’t charge for the savings accounts, so my son and my husband each have their own as well. I plan to move my emergency fund to something with higher interest and a little less accessible soon, but I haven’t decided on what yet.
Hopefully, you can add this expense savings along with your goals of continuing to pay off your debts and still invest in retirement. It may make sense to decrease your payment to your debts temporarily in order to fund these expenses, otherwise you may find yourself back in debt or in even deeper debt. This is one of the many reasons not to live beyond your means. If you are strapped paycheck to paycheck for your regular monthly obligations, these added (known) expenses will dig that debt hole even deeper. You don’t want to have to pay for everything in installments. It is way more expensive that way. But I will save that for another post!
Now it is possible, even likely that these expenses can show up before you are ready for them. In which case, you should pay the cash you have saved for this item. Depending on the amount left, you need to decide if you can afford to take it from your emergency fund or put it on your card. I would prefer using the emergency fund, but then make payments to myself to put that money back. This plan only works if you would not exhaust your emergency fund. You don’t want to end up with a real emergency and no emergency fund!
If you are really struggling with where to find any money to put aside for these expenses, then I recommend taking a hard look at how you are living. Maybe you need to cut back on spending, or maybe even move to less expensive housing or take on a roommate. You should have enough discretionary income left after paying bills to set some money aside for savings, emergency fund, and retirement. If not, then it may be time to make some changes.
If you still need help figuring out your financial situation, reach out to a financial advisor (many credit unions have ones who will meet with you for free). Also, feel free to contact me!
But the long and the short of it is, that money needs to be set aside on a monthly basis to cover expected expenses. Your finances will be much better off in the long run and your emergency account can remain just that, for emergencies only!
If you have questions, feel free to ask in the comment section!