None of us can anticipate all of our expenses. Every stage of life brings a whole new set of unanticipated needs. Even after identifying every outflow you think you might have, there will still be significant unexpected costs. For this reason, we recommend constantly budgeting for financial surprises in an Unknown Budget.
That being said, there are several large expenses which can be anticipated and prepared for even though they are irregular and the timing of them unpredictable.
In 2015, the PEW Charitable Trust analyzed the frequency and impact of household financial shocks. Among households surveyed, 10% stated that “your household had some other large, unexpected expense” during the past 12 months.
Megan’s last memorable other large, unexpected expense was $2,000 to pay for a two-day stay in the emergency animal hospital with around-the-clock IV and medication for when her six-month-old Balinese kitten, Hazel, had an extreme adverse allergic reaction to her sutures from spaying. We are happy to say Hazel fully recovered.
David’s last memorable other large, unexpected expense was last summer’s beach house rental that was twice as expensive as the deal we had received the year before.
Financial shocks can come in all shapes and sizes.
Your son or daughter may get married, and you may be called upon to contribute toward the festivities.
Christmas purchases may get out of hand.
A family vacation may exceed what you budgeted.
Taxes may significantly exceed what you had withheld during the year.
You may decide that your children would do better if they attended a private school.
One of your children may be accepted into the college of his or her dreams with the expense of your nightmares.
You may have to defend yourself in court.
A pet may require expensive medical care.
Your monthly utility bill may be surprisingly high.
You may have to pay for a funeral.
The list of potentially large expenses is practically endless. Families without an emergency allocation frequently have their savings wiped out or are sent into credit card debt when financial shock hits their family.
Credit card debt, once borrowed, is very difficult to repay. The difference between those in debt and millionaires is as small as slight changes in financial lifestyle. A slightly lower lifestyle now in order to afford an unknown budget could be the difference between financial success or failure.
To avoid consumer debt, you need to live within your means even when financial shocks hit. To live within your means during seasons of large expenses, you need to have already lived within your means in the past and developed the savings to cover your current bills.
Take college, a somewhat anticipated large expense. The estimated yearly cost of attendance for a Virginian attending the University of Virginia’s College of Arts & Sciences is $33,008 for the 2019-2020 school year. It is nearly impossible for most families to simply stumble upon $132,032 in their budget to pay for this four-year degree.
To go to college, you either need to take out student loans or have already saved for the degree in the past. The best way to climb the mountain of college costs, like any large expense, is gradually. Save a little bit now, a little bit more in the years after, and let the magic of compounding interest help to carry you along.
This is why we recommend saving at least 10% of your budget into your unknown budget. Out of the remaining 90%, we recommend saving at least 15% towards retirement (more if you are starting late) and only spend 65% or less on living expenses. The remaining 10% can either be allocated to debt reduction, charitable giving, or savings for known large expenses such as a down payment on a home, seed money for a new business venture, the cost of future children, or, if you do not have specific financial goals, adding into your unknown budget for when you do.
This strategy of budgeting should increase your chance for success over the long haul.
Photo by Rijaluddin Abdur Rozzaq on Unsplash