Unexpected expenses can throw a wrench into even the best budget plans. Without a plan to account for these occurrences, you (or your business) could be in deep financial trouble. This article will provide you with strategies for budgeting for unexpected expenses so you can stay on top of your finances.
List Your Fixed Expenses
The first step to budgeting for unexpected expenses is to list out all of your fixed expenses. Fixed expenses are costs that stay the same over the course of several months and are usually recurring costs, such as rent, groceries, transportation, utilities, loan payments, insurance, etc. Take note of the dates each payment is due and how much you need to pay each month. This will help you understand how much money you usually spend.
Calculate Your Total Variable Expenses
After you have listed out your fixed expenses, you need to calculate your total variable expenses. Variable expenses are costs that can change over time. This includes things such as entertainment, dining out, clothing, groceries, and hobbies. Once you have a list of your variable expenses, you can add up how much you spend each month.
Estimate Your Unexpected Expenses
Now that you know how much you spend each month on fixed and variable expenses, you can start estimating how much money you may need to cover unexpected expenses. The easiest way to do this is to create a "rainy day" fund. This fund should be used solely for unexpected expenses. Aim to set aside at least three months' worth of your gross income. This money should not be touched unless it is absolutely necessary.
Start Tracking Expenses
Once you have saved up an emergency fund, the next step is to start tracking your expenses. This will help you keep track of your spending and stay on top of your budget. There are many free apps available to help you track your expenses. Make sure to include both your fixed and variable expenses, as well as any unexpected expenditures.
Create a Budget for Unexpected Expenses
Now that you know how much money you need to set aside for unexpected expenses, you can create a budget for them. Start by dividing your emergency fund into smaller budget categories. For example, you can divide it into "auto repair" and "medical insurance" categories. Based on your estimated expenses, allocate a certain amount to each category. This will help you avoid overspending in any one area.
Review Your Budget Regularly
Once you have created a budget for your unexpected expenses, it's important to review it on a regular basis. This will help you ensure that you are staying on track and have enough money saved to cover any potential expenses that may arise. It's also a good idea to reassess your budget from time to time to make sure that it still meets your needs.
Make a Plan for Unexpected Expenses
Even with a budget and emergency fund, unexpected expenses can still be stressful. To alleviate some of this burden, it's important to have a plan in place for how to handle these expenses. For example, if you have a medical emergency, figure out where you can get the best care for the cheapest price. It also helps to have a list of credit cards and loan options available to you in case you need additional funds.
Unexpected expenses can be a major source of financial stress. However, by creating a budget and an emergency fund, you can better prepare for these costs and mitigate the damage they can cause. Additionally, having a plan for how to handle any potential expenses in advance can help alleviate some of this stress. With these strategies in place, you can stay on top of your finances and remain financially secure.