Unpredictable Expenses
Many a budget has been blown up by an unexpected expense. This happens when a budget is focused exclusively on regular monthly bills and expenses (food, utilities, rent, gasoline, etc.), and unexpected expenses are not taken into account. However, there is a good reason why unexpected expenses are overlooked—after all, they are, by definition, unexpected.
Auto, appliance, and home repairs and maintenance; medical co-pays and deductibles, and insurance deductibles are often referred to as unexpected expenses, which implies there is no way to plan for them. This is a mischaracterization. If you own a car, appliances, or a house you will incur expenses for repairs and maintenance. If you are alive, you will have to pay medical co-pays and deductibles. One knows these expenses will occur; so they are not unexpected. However, one doesn’t know when these expenses will occur or exactly how much they will cost. Therefore, they are unpredictable rather than unexpected. Failure to account for unpredictable expenses will undermine a household budget.
Some money should be set aside each month in anticipation of these unpredictable expenses. Set up separate budget categories for house repair and maintenance, appliance repair and replacement, auto repair and maintenance, medical co-pays and deductibles, insurance deductibles, and others. Accumulate money in these categories until there is a need for it. These expenses tend to be infrequent, but when they arise, they can be quite costly. Budgeting for unpredictable expenses is really just a way to save for them on a regular basis.
It may be months or even years before you need the money you have accumulated in one of these budget categories. If you find you have large balances in one or more of these categories, you may want to put a portion of that money into a short-term certificate of deposit where it can earn some additional interest.
What about the emergency fund? Okay, answer this: Is something that is unpredictable but expected an emergency? Emergency funds should be used for real emergencies such as income interruption due to a layoff, illness, or a calamity of some sort (natural or man-made disaster, for example).
To prosper without debt, budget for those unpredictable expenses and set aside money for an emergency fund, as well.
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