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One of the most frustrating problems in managing money is dealing with those times when the unexpected happens.
Maybe it’s a dead washing machine, new rotors for the car, or you overindulged a bit for your daughter’s birthday.
Expenses happen. Spending happens. Life happens.
And this category of “unplanned and irregular costs” does not fit neatly into our monthly budgets. Over a decade or so of raising a family and managing our money, however, I’ve observed that the total amount of these costs each year is eerily consistent.
And that’s good news, because it means even if we can’t plan for them day to day, we can on a more “10,000-foot-view” yearly basis.
Today I’m tinkering with putting a formula on this “irregular and unplanned expenses” number (aka. Layer 2 of savings). We’re all so different, so I tend to eschew formulaic financial advice, but perhaps if we crowdsource, it’s worth a shot.
Let’s get into it…
There are five big-picture factors, listed below, that influence irregular and unplanned expenses the most.
Remember, the point is to keep this very big picture. These are not sinking funds; it’s a formula to find one overall number.
(For more detail on how I came up for each of these estimates, check out my article on Medium.)
To estimate your annual unplanned spending, simply add up the following:
Kids ($1000-2000 each)
Pets, chiefly dogs ($500-1000 each)
Cars ($2000 each)
Houses ($2000 each)
Trips ($1000-2000+ each)
Here’s how this formula works for us:
2 kids + 1 dog + 2 cars + 2 houses + 1 trip =
4000 + 1000 + 4000 + 4000 + 2000 = $15,000
Bingo!
In the last three years, looking at what we’ve withdrawn from savings for expenses that don’t fit into our usual monthly budget, this number has been $14-16,000 per year.
The importance of estimating this ballpark number is so you can abandon attempting to save in separate buckets for all these different things and, instead, ensure you have a plan for how this total annual cost gets funded. Because it’s not small!
It may be those two months per year you and your spouse get your extra biweekly paychecks, plus your tax refund, fulfills this need.
Or it may mean you need to ensure $1,250 per month goes out of your paycheck and into a separate account each month, one deliberately expected to cycle up and down throughout the year for exactly these types of expenses.
Try the formula on yourself – do you think it estimates how much total spending otherwise throws you off in a year?
The important point is that by planning one overall fund for annual irregular and unplanned expenses, we become flexible to absorb whatever breaks next or some bill we forgot, knowing we have money intended for such things.
And this shift in realistic preparation and expectation reduces a lot of unnecessary financial stress.
Planning is bringing the future into the present so that you can do something about it now.
Alan Lakein
I hope you enjoyed this edition of Under 2, an email series designed to share quick bites of wisdom to empower your financial journey (while keeping it short). Be sure to sign-up below to get these messages in your inbox.
All for now,
Lindsey