Money Savvy: How to Deal with the Unexpected

From our money & finance contributor, Kelly Whalen.

When it comes to budgeting and financial planning it can be a challenge to deal with the unexpected or fluctuations. Budgets often only allow us to work within set parameters like a regular monthly income and monthly expenses. What happens when you’re hit with an unexpected repair bill to the tune of $1,000 or you get some extra income (for example in the form of a tax refund) that’s more than $100? Most often this is when your budget can fail. It’s when even the best laid financial plans get derailed.

We’ve covered your regular budget, and we’ve discussed putting the ‘personal’ in your finances by finding what you value, but now it’s time to consider how to deal with those ups and downs that life is sure to throw your way.

Unexpected expenses are no fun for anyone. While they can not be avoided, they can be dealt with without causing too much frustration and difficulty with your budget.

How to Deal with Unexpected Expenses

Let’s start with what unexpected expenses are and are not. Funds to cover the below costs should be in your checking account or a savings account attached to your checking account (for ease of access). This account is not your emergency fund.

Unexpected expenses are NOT:

• Regular bills. You can and should budget for your monthly, quarterly, and yearly bills with your budget.
• Typical spending. For instance if spending $300 each Spring on new clothes for your family is your average then that should be included in your spending budget.
• Replacement items. Whether you need to replace your car in 3 years or by a new coffeemaker this season you can and should plan for replacing items your own. Setting up a separate savings account for these items is a great way to ‘self-insure’ (and save money on extended warranties).
• Regular maintenance. We know cars need regular maintenance. You should build that cost into your spending. At times you will need to decide if it’s worth repairing or replacing something (for instance spending $200 to repair a vacuum cleaner when you can buy a new one for the same cost may not make financial sense).
• Deductibles. Your insurance policies lay out your out of pocket costs, so have funds on hand to pay the deductible when and if needed.

Unexpected or emergency expenses are things like:

• Repairs, both big and small, such as replacing a broken window or fixing a leaking toilet.
• Health related expenses such as emergency medical or dental expenses for you or your family members.
• Travel costs related to death or illness in your family or extended family.
• Displacement costs due to power outage/weather (for instance having to evacuate due to an impending hurricane).
• Job loss or loss of regular income.
• Pet expenses related to pet illness or injury.

The unexpected expenses above should be covered by your emergency fund. Ideally you should have a minimum of one month saved for emergencies if you’re paying off debt, and you should work towards saving a full year’s worth of expenses (note: not income, but expenses).

Planning ahead for emergencies and expenses is not exactly fun, but having a plan in place will offer you some peace of mind when you do encounter a tough (and expensive) situation.

How to Deal with Unexpected Income

Extra income can be exciting or paralyzing. For some you’ll see it as a nice way to treat yourselves to that handbag you’ve had your eye on or a weekend getaway with the family. For others it will disappear into your checking account and paralyzed by what to do with your funds it will just sit in your account. Of course there are those of you who will also see it disappear in your checking account as you suddenly ramp up your spending because you can suddenly ‘afford’ more.

The key to dealing with extra income is to have a plan. Whether it’s $50 or $50,000, by creating a constantly changing lists of ‘extras’ you can make sure your money is spent (or saved) well.

Here are options to consider for extra income:

• Consider taxes: This is always first when you have extra income. For smaller amounts it’s unlikely to make a difference, while larger dollar amounts mean you must explore what you’ll owe in taxes (if anything).
• Have Fun: Take 10% and use it for something meaningful or fun for you and your family. You may simply treat the family to a dinner out on the town, or you might buy new board games to enjoy at home for years to come. Whatever you value spending extra on – now is the time to do it.
• Save: Whether you need to beef up your emergency fund or you are saving up for long-term goals, consider using most of the funds to increase your savings.
• Pay off Debt: If you are in debt make sure you have a one month emergency fund in place and then tackle those debts.
• Give 10%: We can’t always give back as much as we’d like, so take 10% and donate it to a cause or nonprofit that you support.
• Head to your list(s): I’m a BIG list lover so I recommend creating a list of items you want, things that need to be replaced, and those bigger ticket items that you’d like to get done. I keep a list on hand of items we want that aren’t necessities, like a new quilt for our master bedroom, and eventual replacements, like a new cutting board for the kitchen. I also keep a more expensive list of eventual home improvements like creating a deck in our backyard or buying new interior doors.

While having a plan in place doesn’t guarantee you no stress it will certainly make the unexpected easier on your bank account.

How have you dealt with emergencies or extra income? Did you have a plan in place?