Paycheck Chronicles

Emergency? Or Forgotten Expense?


There's a lot of talk in the finance world about the importance of emergency funds, and planning your spending.  One place where a lot of people, myself included, make mistakes is that they don't have a clear idea of what expenses they have over the course of a year, and so a lot of things become emergencies when they're not.  Paying attention to your forgotten expenses can improve your financial situation dramatically.

Here are all the things I've heard called emergencies this week:

  • Rental house needing small repairs
  • New tires
  • Homeowner's association dues/condo fees
  • Replacing refrigerator
  • Paying for a wedding
  • Vehicle registration fees
  • Deductible on an insurance claim
  • Sports equipment
  • Braces
  • Dress or particular clothes for a special event
Now, all of these things can cost a lot of money, and they might be easy to forget, but none of these things are emergencies because not a single one of these items could not have been anticipated.  Every single one of these expenses are something that you can reasonably imagine that you'll need to pay for it you fall into whatever category (landlord, vehicle owner, homeowner, parent.)

Now, let's talk about some actual emergencies, which would be things that happen rarely enough that it doesn't make a lot of sense to be prepared for them:

  • Sinking house foundation requiring repairs
  • Large medical expenses not covered by generally good insurance
  • A court judgement for an event that could not be anticipated or that turned out in a way that would surprise most people

What Can You Do About Irregular or Unplanned Expenses?

Generally speaking, the solution to irregular expenses is to think about them and make some sort of plan.  How you do that depends on all sorts of factors.  Some people calculate an entire year's worth of those random expenses and keep a separate unplanned expenses account (though no one I know actually calls it that.)  Mary Hunt recommends a paperwork-intensive but highly effective plan called a Freedom Account - I did this for years and it was the most control I've ever had over our money.  I use a series of separate savings accounts for various purposes:  one for household expenses, one for car repairs and vehicle replacement funds, one for a series of expenses we have each April, etc.  It is a little painful when over half of each paycheck gets automatically siphoned off to these special savings accounts, but it is even more fabulous when we're prepared to pay for a surprise bill or an annual expense.

Now, don't get me wrong...very few people are great about having savings for every irregular expense, and it's pretty unlikely that most of us will ever be completely organized for every single item listed.  It's more about mindset.  If you think that all those irregular expenses are emergencies, you're never going to get ahead..  That's not good on many levels.  Instead, look at these type of expenses as exactly what they are, a regular part of life.   The more you can plan ahead, the less you'll be living in a "state of emergency."

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