How many times has an unexpected expense popped up and totally thrown your monthly budget for a loop? What if I told you most unexpected expenses aren’t really unexpected? You can totally plan for most of them and bring your stress levels down by planning for Expected Expenses.
Have you ever seen a social media post or heard your friend freak out that they woke up this morning with a flat tire and have no idea how they are going to afford to fix it and even worse, now they can’t go to work all week? Have you ever been in that situation yourself?
Stuff happens in life but if you can plan for it, you can control it so much easier. One of the easiest ways to plan for these “Life Happens” situations is to create an Expected Expenses Account. Let’s break down the most common Unexpected Expenses and turn them into Expected Expenses
Here are some of the Most Common Expected Expenses you might want to plan for:
Expected Car Expenses
Do you own a car? Things are gonna happen with that car, I guarantee it! Plan for them.
Figure out how much you can expect to pay every year and divide it by 12.
Put that much in your Expected Expenses Account every month. When it comes time to pay, you will have it ready to go without taking on debt or freaking out.
- Registration– This is a semi large regular annual expense that will come up EVERY YEAR. Look at last year’s registration fee and divide it by 12, now put that amount into your Expected Car Expenses every month and when the time comes next year, you’ll be ready to pay it, cash money.
- Car maintenance–
- Oil changes happen every 3-5,000 miles
- Tires should be replaced every 6 years or so, more often if you drive a lot
- General things that could break– we’ve had to replace my AC (totally necessary in Hawaii year round), change out something called boots on the axle of my car (sorry, I’m totally not a car gal, it could be car shoes for all I know) and get my car battery changed because the kids left the light on over the weekend and no one noticed. All those costs added up to over over $3,000! Random things happen to cars but they are not totally unexpected. I’ve had my car for over 10 years now. I love it! Those fixes were not cheap but we put away a little money every month with the assumption that every once in a while, something will happen, so we want to be ready.
- Car Insurance Deductibles– When you get car insurance, you are told how much you will be responsible to pay before they will pay out. Make sure you are saving up every month so that you can cover your deductible in case something happens. (Once you reach your deductible amount, you can just let that amount sit there and use the money you were putting towards it towards something else)
Expected House Expenses
Home ownership can be a wonderful thing if you’re ready for it but it comes with a lot of Expected Expenses:
- Roof Replacement
- Water Heater
- Foundational Issues
- Plumbing Problems
- Appliances Dying
- And tons more!
It it said to expect to spend 1-4% of your home’s value in maintenance every year! Those are Expected Expenses. As a homeowner, you signed on to get dirty and throw money into your house to keep it livable. So set yourself up for success!
Actually plan to spend that 1-4% on your house EVERY YEAR. Most years, you will hopefully get by with nothing going wrong, but as all homeowners know, if one thing is going to go wrong, everything else will too at the same time.
Figure out 1-4% of your home value, divide that by 12, put that amount in your Expected Expenses account very month. That way, when, after 3 years of nothing going wrong and in year 4, a tree falls on your roof, the water heater springs a leak, and your stove dies all the week before Thanksgiving, you will have that money saved up and ready to go. (I actually had a friend that happened to, so not fun)
Example:
Home Value $350,000
$350,000 x 2% = $7,000
$7,000 / 12 = $584
Plan to put $584 in your House Expected Expenses account every month. If you actually have to do a home improvement that month, take that amount out of the account and keep on with your life.
Expected Christmas/Birthday/Holiday Expenses
How often have you been blissfully enjoying the fall weather, apple cider, and leftover Halloween candy when all of a sudden, you realize you need to start shopping for Christmas Gifts?!?
Shopping for gifts for your loved ones can be a lot of fun but it can quickly become a giant ball of debt stress come January if you don’t plan for it.
Holidays come every year. They are not unexpected. So set yourself up so that you can shop til you drop without any after holiday guilt. (except maybe a few extra pounds, those holiday cookies aren’t gonna eat themselves!)
In January, look at your expected list of people who you’d like to give gifts to in the coming year and set a reasonable budget. Divide that by 12 and put it in a Holiday Expected Expenses Account every month.
When the time comes to shop, you know how much you have to spend and can go nuts. If you find some good sales, you might even have some extra left over to buy yourself a little something special guilt free. 😉
I’ve even had to start saving for birthdays.
Both of my kids and one of their grandmas have birthdays in the same month. (Way too much cake is consumed in July!) But my kids love to have parties and invite their friends to help them celebrate. I’ve noticed over the years that July is definitely a high spend month for us due to all the birthday love. So we plan for it.
Just like for Christmas, we figure out how much we want to spend on gifts and parties then save a little bit for it every month. Cake and balloons can flow freely without me freaking out when the bill comes.
Budget for Holidays and Birthdays:
- Gifts
- Meals
- Parties
- Decorations
Other Expected Expenses to plan for:
- Medical Expenses
- Co-Pays
- Deductibles
- Vitamins/Prescriptions
- Pet Care Expenses
- Vet Visits
- Food
- Grooming
- Boarding or walking, if necessary
- Annual Membership Fees
- Costco, Amazon, Credit Card Fees, Gym, Online Memberships, Netflix
- Insurance Payments
- In order to save money, we pay most of our insurance bills annually or semi-annually
- Car insurance
- Life insurance
- Renters Insurance
- In order to save money, we pay most of our insurance bills annually or semi-annually
- Vacations
- We try to plan 1 or 2 mainland (we live in Hawaii)trips a year to see family and new places
- And 1 or 2 staycations a year to play tourist for a few days on the beach (it’s amazing how just a few days away from regular life and internet can reset my happiness meter)
Create an Expected Expenses Account
Once you have a good idea of what your possible Expected Expenses should be, create an Expected Expenses Account. I love Ally Bank. (not an affiliate, my actual bank) It’s online, for easy transfers to my regular bank but not so accessible that I might dip into it for everyday expenses, offers higher interest accounts, and allows you to create buckets in your accounts specifically for things like Expected Expenses categories.
I like to have my Expected Expenses in easily accessible, high interest accounts. If you are not planning to withdraw from the account more than 5 times a month, go for a high interest savings, they usually offer higher interest. If it’s an account you may withdraw from more often, just go for an interest earning checking account so you don’t create “excess savings account withdrawal fees.”
Add up all of the possible “oh no” situations that could take place in your life and start to save, small amounts, every month, for them, allowing you to turn unexpected expenses into Expected Expenses that you can pay for with cash!
What To Do With Extra Money
Now you might be thinking:
What if I’m savings for all these Expected Expenses and the expenses never come?
I’m totally there with you. We save for car repairs every month, but only have to ever pay for big fixes every few years. There is as point where you can feel that your Expected Expenses account is full enough. It is up to you to decide what “full enough” looks like. Personal Finance is always just that, Personal.
When certain Expected Expense accounts are full enough, take that extra money that you’ve been dutifully putting away for Expected Expenses and start putting it towards debt, other Expected Expenses Accounts, Retirement Accounts, or Investment Accounts.
Just don’t stop putting it towards Expected Expenses and start going crazy spending it all over on other things because eventually, an Expected Expense will come up and you’ll have to pull from that Expected Expenses account and begin refilling it again.
Better to keep that money tagged in the budget for Expected Expenses and build your Wealth by paying down debt or building your investments while you wait for the next “uh oh.”
Expected Car Expenses Example:
Our combined car registrations are about- $700 a year
Car insurance is -$1,200 a year
Car Insurance deductible is- $700
4 oil changes a year (we don’t drive much on an island but cars take synthetic)- $480
Known Expected Car Expenses for the year – $3,080
Divide by 12 months- $3,080/12 = $256
We know we will need to put away at least $256 a month for Expected Car Expenses but this doesn’t include things like tires, new ACs, or Boots for my car.
Because these don’t happen very often but are big expenses when they do, we make sure to put in and extra $20-50 every month to make sure that the money will be there when we need it.
Fully Funded Expected Expenses Account?
But I don’t want to have $10,000+ sitting in my Expected Car Expenses account earning under 1% interest for years on end. (When you reach this point, it’s a great problem to have.) So whenever the account reaches $5,000, I start putting the money in other places, in this order:
- Pay off any debt that might be around
- Begin padding my other Expected Expenses Accounts to the maximum levels I feel they should be
- Max out our IRAs for the year, if we haven’t already
- Put any extra money into our Brokerage Index Funds so that it can grow with the magic of compound interest, yet still be accessible if we need it.
Wrap Up
I hope this was helpful in understanding that most “Unexpected” Expenses aren’t really that unexpected at all. If you own stuff or just live, things are gonna happen, and you can usually tell what kind of stuff even without a crystal ball. With a small amount of extra planning and saving, you can save yourself hours of grief and tons of money in debt interest payments each year by funding your Expected Expenses Account.
So, if you haven’t already, go open an Expected Expenses account, or even a few if it’s easier for you to organize in your head, and start treating your Expected Expenses deposits like regular monthly bills, just like your rent or car payments. You’ll thank yourself when the next “Unexpected Emergency” becomes just a nuisance in your day.
So get out there and crush those “Unexpected” Expenses and grab a taco for yourself on the way home.
Set Yourself Up for Success with Expected Expenses Accounts
1. Figure out Your Expected Expenses
- Car Expenses
- Registration
- Maintenance
- Deductibles
- Homeowners Expenses
- 1-4% of Home Value Every Year
- Roof Replacement
- Water Heater
- Foundational Issues
- Plumbing Problems
- Appliances Dying
- And tons more!
- Budget for Holidays and Birthdays:
- Gifts
- Meals
- Parties
- Decorations
- Medical Expenses
- Co-Pays
- Deductibles
- Vitamins/Prescriptions
- Pet Care Expenses
- Vet Visits
- Food
- Grooming
- Boarding or walking, if necessary
- Annual Membership Fees
- Costco, Amazon, Credit Card Fees, Gym, Online Memberships, Netflix
- Insurance Payments
- In order to save money, we pay most of our insurance bills annually or semi-annually
- Car insurance
- Life insurance
- Renters Insurance
- In order to save money, we pay most of our insurance bills annually or semi-annually
- Vacations
2. Open An Expected Expenses Account
- Look for High Interest Savings Accounts
- Liquid to Withdraw but not too accessible to be dipped into for unnecessary purchases
3. What to Do When Your Expected Expenses Accounts are Fully Funded
- Pay off Any Debt
- Fully Fund Other Expected Expense Accounts
- Max Out IRAs
- Invest in Taxable Brokerage Account
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