Unexpected expenses typically $2000 annually
‘œSave it for a rainy day’ ‘“ Proverb
According to a study released by the Consumer Federation of America, the typical person has around $2,000 of unexpected expenses in an average year.
Here’s more: ‘œThe ability of Americans to cover unexpected expenses, such as a car repair or emergency dental visit, greatly depends on their having an emergency savings fund,’ said Stephen Brobeck, CFA’s Executive Director. ‘œThose with a fund are highly likely to be able to afford these expenditures. And they will be less dependent on high-cost credit, such as payday loans or even credit cards, to bail themselves out,’ he added.
What are unexpected expenses?
- The car breaks down.
- The plumbing stops up.
- You decide to surprise your partner with a weekend get-a-way.
- A visit to the emergency room requires a hefty deductible.
- Your hard drive crashes and the Geek On Call renders it useless.
- A mole starts to wreck havoc on your lawn and an exterminator is needed.
- The roof springs a leak.
- You come up short at tax time.
You get the idea. The writer at No Credit Needed polled his readers on how much they had in their short term savings and many of the comments included money set aside in an emergency fund to cover these types of expenses. But here’s another interesting stat: 20% of his respondents had less than $1000 set aside. Do the math’¦ and those people likely will have to put some unexpected expense on a credit card.
All the experts suggest that we allow for the unexpected. Gayle Rose Martinez at the University of Wisconsin writes, ‘œNo matter how much we plan, life has its own agenda. An unexpected expense can create havoc with any spending plan. The best way to deal with the unpredictability of life is to have layers of protection. In our spending plans this can happen by developing categories of savings that will build up over time.’
‘œThese categories would be for expenses we know could happen in the future, but there is no time frame attached to them. These categories could be labeled car repair, house repairs, yard expenses, medical expenses, emergency expenses. Then you will be ready when the unexpected pops up. Over time, $20 or $50 a month will add up and create a layer of protection for you when life brings an unexpected expense.’
So how do you get started? The Digerati Life has 5 Different Ways To Build An Emergency Fund. He writes, ‘œThe emergency fund is there to ensure that you have a liquid cash source when you need it most and if you can make sure it exists for you at all times, then you’re in fine shape, regardless of how you define an emergency.’ He lists the different faces of emergency funds and rates these different sources of cash.
The writer at ZenHabits provides a list with 21 Strategies for Creating an Emergency Fund. He offers some practical steps to get people started and writes, ‘œIf you have trouble saving, it’s not enough to tell you how important it is to have an emergency fund. You need some strategies for doing it.’ Click over to learn more.
And finally, my favorite guy, Trent at The Simple Dollar with his dollar-a-day approach. He writes, ‘œCan you spare $1 a day? Then you can get started with an emergency fund. With just $1 a day, you can have an emergency fund of almost $400 by the end of the year and thus reach the $1,000 mark in about two and a half years.’
So what are some of your unexpected expenses and how have you covered them? How much is in your emergency fund and how did it get there? Love to hear your thoughts below.
I have a savings account with ING Direct and deposit $50 weekly from my checking account. I just recently moved and used some of this savings for my moving fund.
I started over 20 years ago with a budget of $100/month of spending money which had to include surprise expenditures. Once I got my first full-time permanent job, I could separate out some of my money for emergencies. And now, after many years of working with and modifying my system, I have the following savings categories:
Car upkeep (gas, insurance, maintenance, repairs, steering wheel cover, defensive driving class) – $150/month
Next car – $50/month (I pay cash for 10-year-old reliable cars and so far have kept them for ten years, but now that I’m on my third car, I do have some extra saved in case I buy a lemon and have to buy another car right away)
House maintenance (roof replacement, air conditioning replacement, paint, appliance replacement, etc.) – $133/month (I started at $100 and have increased it with inflation each year at raise time; before I got the house, I had a larger future house buying category)
Long term fun (travel, furniture, electronics, and any other purchase too pricy to pay for from my monthly budget) – ~$200/month I think
Medical (new category, now that I’m making myself get check-ups and whatnot: check-ups, medicine, future hospital bills; and I’ve just now decided to add vitamins to this category and changing the name of it to Health) – $100/month (this should be higher, especially as I get older, but it’s a good start for now)
Home renovation (another new category: new laundry room, screened-in porch, space for a dishwasher) – $100/month (oh, I wish this was higher; I may transfer some of my long-term fun money into this fund)
I’m also thinking of starting another category for lending to family members and subsidizing impoverished family members on once-in-a-lifetime family opportunities (so far: family trips). So far I have been doing this out of my monthly budget.
If I had a normal job, I’d also want a category for getting laid off, but I work for the state, so that is a highly unlikely risk for me. Although I’m starting to think it might be nice to have some money in case I ever wanted to quit without having another job lined up.
I recently had to increase my car maintenance savings to deal with reality (when a category goes negative for a whole year, that might be a sign that you’re doing something wrong!).
I keep track of this money in a spreadsheet. As you can see, you can let some categories go negative for a while so long as the total is positive. It’s like an electronic envelope system in that way.
Most of the actual money is in a high-interest internet savings account; some is in stocks. Oh, and my employer has one of those plans where you can set aside some money for medical expenses before taxes each month, but you have to spend it or lose it by the end of the year–some of my medical money goes there.
At the end of each month, I gleefully look at money I spent which could come out of all these categories and subtract them from the totals before adding the monthly amounts from my monthly paycheck. Then I subtract the sum of these category totals from my total savings (and stocks) to see how much extra I have with which to fantasize about super early retirement. (Right now, that figure is around zero. Oh well.)
I would say most of the expenses I’m saving for are not unexpected, it’s just that you don’t pay for them every month or you don’t know when you’ll be spending the money. Like I know I have to pay for car insurance every six months–if I save ahead of time, I’ll have enough to pay the whole amount up front, thus saving the installment plan fees. And I know that I will eventually have to replace my water heater, car, etc, I just don’t know when. It’s not a surprise that things (and people) break down, it’s just a surprise that they’re breaking down now.
My favorite example of when I used one of these funds was when I was driving for a long weekend trip four hours away and my car broke down one hour into the trip. Fortunately, it was in a city, and I had no trouble finding someone to fix it–after Labor Day! In the olden days I would have called a friend and begged them to drive for an hour to come pick me up, then begged another friend to drive me back there to pick up my car. And I would have had to scrap my trip. But since I had this fund, I just rented a car, took my trip anyway, drove it home afterwards to go to work, and drove it back to the repair place when the car was ready. I felt so rich!
It’s also nice to get a cash discount when buying insanely expensive things like a new central air conditioner and to never have to pay interest (except for my house).
I currently deposit $100 per pay cheque into my emergency fund. After my last bout of unemployment about 5 years ago, I started up the emergency fund just in case. I’m glad I did, as I’ve used it to pay for a new windshield in my truck after mine cracked, and also used some while I was off this summer too. It’s a good practice to have an emergency fund, as you just never know.
Right now, we have a year’s worth of living expenses in our emergency fund. We’re playing it conservatively because of the current investment climate, but a portion of what’s in these funds will probably be invested in the market via dollar cost averaging in the next several months.
Really, it sounds they aren’t unexpected as much as ‘I should have realised that would break’ expenses.
My emergency fund has about £3500 in it, I also save up for irregular bills (inc Xmas, vacations and so on) so that they don’t come out of there, and I save 1% of my house value annually to pay for repairs and so on to that.