A common question for people just getting started with budgeting is how to budget for the little things we can’t plan for, that unexpected car repair or hospital visit.
The short answer to this question is that you both can and can’t budget for these. What??
The longer (and more helpful) answer is that while it’s mostly impossible to budget for the unexpected each month, you can handle these in your budget by building up an emergency fund.
While the typical guidance is that you should have 3 months of income in your emergency fund, you may want to go above and beyond this for typical emergencies. For example, look at your car repairs last year. If it totaled to $1000, you may want to set aside $1000 or more this year for car repairs. What you don’t use can be rolled into the next year, or to build up a fund to replace your car when you need to.
When you use this money from Savings, it’s basically not reflected on your budget. You’ll show an unbudgeted expense for car repair, and an equal amount of income (transferred from Savings) to offset the difference.
So what should you be saving for? Your emergency fund should mainly be for if you lose your job, so some things to save for on top of that:
- Car Fund
- Vacation Fund
- “Freedom Fund” – For periodic expenses like insurance, yearly property taxes, HOA fees, etc…
- Wedding Fund
- House Fund (if you already own a house, having savings set aside for emergency repairs and insurance deductibles is a good idea)
Just keep in mind that this money should be set aside “virtually”. You probably don’t need liquid (immediate) access to cash for all these things at once. If you expect a car in 3 years, you don’t want cash just rotting away in savings, at least put the money in a CD or better a bond fund, so you’ll gain more “free money”.
