One question people who are trying to get their finances in order often ask is: “How do I budget for expenses that I don’t know about?” It’s a good question and part of good financial planning is knowing how to be prepared!
Unfortunately, not budgeting for unknown expenses is also one of the main reasons why people often find themselves short on money or having to borrow money to pay for the unexpected.
While you may not know exactly when certain things are going to happen or how much they’re going to cost when they do happen, you can still budget for them. One of the easiest ways to accomplish this is to do something that we talk about often – having an emergency fund in place.
What is an emergency fund?
To refresh, an emergency fund is an account that you set up and put money in just for emergencies. You don’t touch this money when paying your regular bills – you only use it when those unexpected expenses arise.
An emergency fund should be used for anything considered an unexpected expense, such as home or car repairs, medical bills or an unplanned trip to visit a sick family member and so on. Emergency funds should also be used in the event of a job loss to pay for your bills and other regular expenses – however, as we just mentioned, don’t tap into this fund unless it’s a true emergency and your regular income has been depleted.
How much do you need?
Any amount of money in your emergency fund is better than nothing, but realistically, the fund should cover around 6 months of your regular expenses. This way, if there is a job loss or reduction in income, you have the time to find another job and replace the income. In addition, if you have 6 months-worth of living expenses saved, chances are, if you need your car repaired or something in your home breaks, you’ll have plenty of money to cover it.
What happens if I have to use it?
If you have to use money in your emergency fund, a good rule is to replace what was taken out as soon as possible. For example, if there’s a job loss, you’re not going to be able to replace the funds right away, but it’s important to start saving again as soon as possible.
But I don’t have 6 months-worth of income to put in it
One of the biggest reasons why people fail to set up an emergency fund is because they think they need to put a large sum of money into it all at once, but this simply isn’t true. Most people don’t have 6 months or more of income to just stick away into a saving’s account, which is where budgeting comes into play. Determine how much you can set aside every month and continue to put that amount into your emergency fund until the 6 month mark is reached.
In summary, instead of worrying about unexpected expenses, put your mind at ease and start planning today to build up an emergency fund that you can use if or when the unforeseen does happen.