How to plan for the unplanned
14 September 2017
Life happens. The geyser bursts. You get an unexpectedly large electricity bill. You break a tooth opening a beer bottle. (Don’t ever do that, by the way, it’s not as cool as you think.) Life happens, and when it does, chances are you are not ready for the financial fallout. Unexpected expenses can happen at any time. Some expenses may be small like a last-minute birthday gift, but others may be huge and take years to get over. Both, however, can blow the most responsible budget out of the water. But, fortunately, both can also be planned for.
Know what your planned expenses are
Have you ever reached the end of the month and looked at the amount of money you have left ‘till pay day and you wonder “where did all my money go?” If you haven’t then you are a superhero when it comes to planning finances and, really, you don’t have to read any further. But if you are like most mere mortals, you have and you quickly put in place a survival strategy that involved eating lentils and water and selling your unwanted DVDs online for extra cash. Thing is, money only disappears when you don’t know where it is going to. First step to planning for unexpected expenses is to budget for the ones you know about. Yes, the dreaded B-word. By knowing what your regular expenses are, and keeping track of them, you prepare yourself for the ones you don’t yet know about. So, when an unexpected expense occurs, you can look and decide where you can make changes to accommodate it.
Not sure where to start putting your budget together? Download this handy and budget-friendly (free) budget template to get you started: Budget
Be sure your “unplanned expenses” actually are unplanned
There are some extra expenses you just know you are going to have. In winter, your electricity will go up, once a year you will have to get your car license renewed, maybe September is a particularly Birthday-heavy month, you are going to have to buy birthday gifts for the dozen or so friends and family who were born then. There are going to be seasonal expenses during the course of the year. Some are expected, like those birthday gifts, others may be less so, like a tree falling down because of heavy August winds. Make a list of the expected and note how much extra you spent each month. Add those up for the year and divide it by the number of pay cheques you get (let’s assume that’s 12). That is the amount you should be paying into a separate account. When you turn unexpected expenses into expected ones, that’s practically a financial plan, my friend.
Keep a separate account for emergencies
I don’t know how you operate but if I have a little extra in my cheque account at the end of every month, I will spend it. And I know of many people who will do the same. Which is why I have two separate accounts – one for regular transactions and one for emergencies. Any extra money I have instantly goes into that account in anticipation of unexpected expenses. Even if you think you don’t have enough to justify a whole new account, open one anyway. If you make this behavior a habit, a little saved here and there adds up to a lot over time. But remember that the money is not for those days when you feel you deserve a facial or just have to have the next game – before you splurge on impulse buys, remind yourself of your financial goals. Sure, little treats are nice but so is eating. And having a roof over your head. And having electricity.
Make your emergency money work for you by putting it in a savings account. To open one today, click https://www.absa.co.za/personal/save-invest/saving-for-a-rainy-day/explore/
Saving money on insurance doesn’t always save money
Insurance is generally considered a grudge purchase. I mean, who wants to spend money on something that you hope will never happen? Plus, medical insurance, car insurance and household insurance premiums are expensive, right? Right. Thing is, insurance is the ultimate “saving for a rainy day” policy. Premiums are expensive? Imagine a stay in hospital. Imagine the cost of repairing your car. And someone else’s if you’re at fault. You insure these things because trying to cover the cost when something goes wrong is not merely about “oh well, we’ll have to cut back on eating out this month,” they can take years to recover from. Yes, shop around and get the best deal in insurance, but do insure if you possibly can.
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Don’t use your credit card as an emergency fund
Credit cards have many advantages. They’re convenient, safe, offer rewards and allow you to defer payment of goods ‘till the end of the month when you get paid. But they are not an appropriate emergency fund for when you are hit with unexpected expenses. They charge interest and, because they are so easy to use, they may make you forget the extra money you had to cough up and you get false sense of your financial situation. If you do have to use it in an emergency, make sure you adjust your budget to pay it off as soon as possible.
Cultivate good money habits
Despite what it may feel like when you are sitting with too much month at the end of your money, you are not the victim of someone’s evil plan to take all your money and leave you destitute. You are accountable for the money you spend wisely and the money you squander. Create good money habits. Draw up a realistic budget and stick to it. Yes, you can budget for the occasional treat. But, make saving automatic so that it’s the first thing you do when you get your pay cheque. Avoid impulse buys. If there’s something you just have to have, adjust your budget and save up for it. Good money habits are the best way to prepare for the unexpected – they allow you to control your future, instead of always feeling that you are playing “financial catch-up.”
Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.