An Alternative to Emergency Funds
Emergency funds are an important part of your financial plan, covering an unexpected expense or normal expenses during a period of reduced income. But many of the situations traditionally associated with emergency funds aren’t really unexpected expenses and can thus be handled in a different way.
Many people confuse irregular expenses with unexpected expenses. An irregular expense is typically known, or can be estimated beforehand, but occurs on an irregular schedule. Things like auto repairs, medical costs, household repairs, and even gifts fit this description. One of the nice features of tracking your expenses and using a budget is that you start to get a better understanding of such expenses.
Take gifts, for example. Obviously, birthdays and holidays are gift-giving occasions that are known ahead of time. By tracking your expenses, you’ll probably see other trends emerge as well. You may notice that you get invited to a few weddings each year, or that a handful of friends have babies, etc. Once you get a sense of the total amount required in a typical year, you’ll be able to add that amount to your budget.
If you have an expense item in your budget for each irregular expense category, then savings will happen automatically. If you budget $1,200 a year for auto repairs, you’ll save $100 each month that a repair isn’t needed, and that money will be available when the inevitable repair does come up. If the repair is needed early, before you have saved enough, then you can dip into your emergency fund, but then the money you allocated towards repairs in future months should be used to repay the amount you took from that fund.
I have many expense categories in my budget that I rarely use. Most months I spend nothing and the budget surplus accumulates in savings. Then, when an expense is necessary in that category, the money is already in place. You shouldn’t have to rely on an emergency fund to cover irregular expenses, since they can be planned for in a budget. That will allow you to save your emergency fund for true emergencies, such as the loss of your job.
Do you budget for irregular expenses that others define as “emergencies”?
Friday, June 5th, 2009 at 10:36 am