Most of us have been there; you make your monthly budget, start making purchases based on your budget and then along the way, you get stuck with an expense that wasn’t included in your budget.
If it is a small expense, you can always divert a few dollars or take some money from your miscellaneous category to sort out the issue. However, you might feel stuck if it is a relatively large expense.
So, what can you do to ensure you are not caught off guard with the unexpected expenses? Read on to find out how you can budget for unforeseen expenses.
1. Identify all possible unexpected expenses
Before you start planning on how to budget for unexpected expenses, you must identify what they are. When brainstorming overlooked expense in your budget, think of them by category to make your work easier.
For each category, identify potential unexpected expenses and brainstorm until you have exhausted every possibility. For instance, for the home category, you can list things such as quarterly bills, maintenance, pest control, appliance repair, and furniture replacement.
For car category, you can list things such as oil change, repairs and maintenance, traffic tickets and car tag. For kids category consider field trips, school supplies, and birthday gifts as potential expenses.
2. Build a forgotten expenses category into your budget
Once you have listed your expenses in step one above, all you have to do is put your knowledge into action and plan for the future. Estimate the overall cost of your overlooked expenses to understand how much money you need to set aside.
Make sure you determine how much money each item on your list will require. Even though you may guess, do your best to make your guesses as close as possible.
For instance, you can contact your home maintenance company to get some quotes or do a little research online to find price ranges for specific activities.
For things within your control, such as birthday gifts and landscaping, always limit the costs to reasonable limits you can afford. If your estimates were based on annual figures, divide each amount by 12 to determine how much money you should set aside every month.
3. Pay off your debts
Are you wondering how this point is related to budgeting for unexpected expenses? Well, the truth is that most of us turn to lenders when faced with financial emergencies.
However, no lender will be willing to give you a loan if you have a record of not paying your debts. Even bad credit loan lenders may reject your loan application if you already owe other lenders.
To be on the safe side, consider paying off your debts and start working towards gaining your financial freedom and peace. Do whatever you can to pay off your debts in full so that when the unexpected strikes, you have got options.
4. Build an emergency fund
Although no one plans for their loved one to get sick or their car to break down, we must acknowledge the fact that these things happen. Having an emergency fund helps you prepare for such situations ahead of time so that they don’t affect your finances drastically.
Financial experts say that you need to set aside an emergency fund equivalent to at least three months’ worth of your expenses. The easiest way to build an emergency fund is by automating your saving plan and developing financial discipline.