How to Budget for Contingencies
We’ve all been there: you budget, you start shopping according to your budget, and then you get stuck with some spending that isn’t in your budget.
If it’s a small expense, you can often shuffle a few dollars or get money out of the “miscellaneous” category of your budget (if you’re using YNAB , this category is helpfully called “things I forgot to budget for”). If this is a larger expense, you may need to invest in your emergency fund.
But if you want to really understand your finances, you can turn those unexpected expenses into a new budget line.
In The Financial Diet, Annika Fordell explains why she started including the previous month’s contingencies in next month’s budget :
In October, I shelled out $ 80 on over-the-counter drugs. First, from a UTI, and if you’ve ever had one, you know it’s a nightmare and you’re not looking for coupons online – you just want to treat it immediately. After that I caught a cold. Then I started having digestive problems. Including a “pharmacy” item in the November budget has been a good decision so far.
This method works because it gives you a clearer idea of where your money is actually going and helps you prepare ahead of time for those expenses. Whether you’re trying to pay off debt or save for a big financial goal, structuring your budget to eliminate as many “unexpected” expenses as possible gives you a clearer idea of how much you can spend each month while still keeping your savings or debt. … the purpose of repayment.
Yes, that means you may have to cut another budget line to balance your expected pharmacy costs – or car repair costs, or wedding gift costs, or any other expense that is not currently included in your budget. On the other hand, if you don’t need over-the-counter drugs this month, you can turn the money you didn’t spend into “clothes,” “eating out,” or “paying off debt.”
On the other hand, you should probably avoid spending the money you save on car repairs on anything else, because when your car breaks down, you’ll be glad you saved money. (Saving a little money every month for a car repair, wedding, or laptop upgrade that you may have to cover in a year is called a “payoff fund,” and it’s one of the best budgeting methods ever.)
After all, the most unexpected costs are not really unexpected . They are unforeseen . If you buy a car, sooner or later you will have to get it repaired. If you have friends and family, at some point they are going to get married / have children / have birthdays. Even the best food organizers have nights when there is nothing in the fridge and decide to order a pizza. Things like that happen.
And when they do, add them to your budget because these things are likely to happen more than once and you want to get ready.