In an ideal world there are no nasty surprises. Families would be able to go through life with enough income to pay their bills, enjoy a holiday or two, and then when retirement comes around there would be sufficient funds to provide for a comfortable old age. Sadly, life is rarely that simple.
The recent recession certainly caught the financial sector about planning for unexpected expenses, and there were numerous casualties including many financial institutions themselves. Recessions are not an annual occurrence but when they do occur, they highlight the misery they can bring to the more vulnerable in society. It is a powerful argument for everyone to sit down and look at their finances and ask themselves what they would do in a time of financial crisis.
Record the Details
It is a fairly easy exercise to write down monthly expenses and create a budget. These expenses should never be more than the regular income coming into the house over the same period. Some of the expenses may be in the form of loans. A mortgage is likely to be the biggest monthly bill over medium to long term. Other loans may be short term and while interest rates are low and if the repayments are manageable there is every reason to borrow for valid reasons.
‘Manageable’ is a key word. The problem of an unexpected bill is that it is often not ‘manageable.’
Some bills are monthly but others come in from time to time. It is important that whenever those periodic bills are due there is money to pay them; they are irregular but they shouldn’t be unexpected. Such items are best listed so that there are no surprises. They may be tax estimates, seasonal items, or servicing requirements for the car.
Once a comprehensive list is prepared, and in many cases that is likely to include estimates they should be totaled to provide an annual amount needed to cover irregular expenses. It is worth knowing the amounts that come under different headings ranging from house to car and medical. The total needs to be divided into 12, perhaps even better 10, so that an amount is set aside from monthly income ready for the bills when they actually come in. The beauty of dividing by 10 is that it creates a buffer which is always useful if some of the estimates have been inaccurate.
Estimation
That was the easy part. The difficult part can be estimating those amounts accurately. While it may still be a problem it could be something that is written down into the individual month’s expenditure so it is always part of budgeting. For example, I always put aside a little money for car maintenance and repair expenses that I’m sure I’ll have at some point or another.
An emergency fund is the next stage. It is there to meet the truly unexpected and should be the aim of everyone looking to manage their finances. If that fund needs to be used for any regular or irregular payments it may be time to look at your budget again, or look at other routes to create income like a side hustle. The simple process of beginning to plan finances will help avoid unexpected struggles later on.
Discipline
The discipline that comes from doing this planning and then monitoring progress improves everyone’s ability to actually manage their finances because they have a greater understanding of their circumstances. Just as a business needs to plan, monitor and adapt to changing circumstances individuals and families must do so as well. It may seem a daunting task at the outset but things will become easier. It may not be enough to combat a serious recession but those who take the time to plan their financial lives have the best chance of being in control of things. The time is well worth setting aside and the task becomes easier in successive years.
How has financial planning helped you be prepared for unexpected expenses?
