The Law of Unexpected Expenses (and Why an Emergency Fund Isn’t The Right Way to Plan for Them)

It seems in the past every time I worked to repay debt or save up for something, an abnormal event would derail my finances.

I recall a time that I booked a trip to Vegas. I worked hard to save for a fun weekend away, then, the day before I was set to leave on the trip, I withdrew cash from the bank, and as I drove home to pack my suitcase, my car broke down. To be clear, my car literally broke down as I left the bank with my cash for my trip.

It felt like some sick joke, like my car blowing up with my hard earned money going up in smoke along with it.

Of course, I still went on the trip as it was booked with friends, but I struggled to enjoy myself knowing that the money I was spending on my mini holiday would be needed when I returned home to repair my car.

I know I’m not alone with these kinds of coincidences as my friends echo the same frustration. 

It seems for so many of us that just as we repay debt, or accomplish a savings goal, an extraordinary event creeps up to curtail any financial progress.

The law of unexpected expenses

Your budget likely has fixed expenses like rent, car payments, and subscriptions and then it might have variable expenses too, like gas, groceries, and clothes.

In many cases though, there is no great way to handle unexpected expenses – especially because you don’t know when they will happen or how much they’ll cost you.

In my case, how could I have known my car would break down, and how could I possibly know how much it would cost.

And yes, an emergency fund is helpful, but emergency funds aren’t specific enough.  In some cases, emergency funds might be one, two, or more months of income – meant to replace income should it cease.

As I dug deeper into budgeting, I wanted an emergency fund, but also a separate fund for expected unexpected expenses.  In time, I became good at anticipating and saving for my unexpected expenses.

If you want to curb the stress of your unexpected expenses, here’s how you can do it too.

1. Brainstorm past expenses that derailed you financially.

I’ve shared with you that my car broke down and it derailed my finances.  I can also recall being shocked by owing unexpected income taxes and being completely caught off guard by extra expenses in December due to Christmas. Property taxes (although not totally unexpected) also caused financial stress.

Try and brainstorm times in life when your finances were devastated.  And, if you don’t have too many examples yourself, think of conversations had with friends and family.  

2. What expenses have crept up on you, causing you financial stress?

If you need some brainstorming help, here are potential unexpected expenses to consider.

  • Vet Bills
    • These are rarely expected and often emergencies.
  • Medical Expenses
    • These are also rarely expected and often emergencies.
  • Income Tax
    • An amount owing to the IRS is often a shock.
  • Vacations
    • Some vacations are planned, but for any last minute travel, you might as well plan.
  • Gifts
    • It’s often not until the week-of that many of us think about budgeting for birthday, wedding, Christmas, and anniversary gifts.
  • Car Maintenance
    • New tires, general repairs.  Unscheduled or unplanned maintenance is rarely anticipated.
  • Any Other Annual Expenses
    • Annual expenses are easy to forget.  They’re a big financial hit at the moment, then forgotten for the balance of the year.  It’s best to plan 365 days in advance to lessen the blow of any big annual expenses.

3. Try to estimate the annual cost of potential unexpected expenses.

Using the list, you brainstormed, try and estimate an annual cost.  For example, when thinking of your pet, think of what you’ve spent at the vet in a previous year.  When thinking of gifts, think of what you’ve spent over the course of an entire year.  When considering your car, get a sense of what you spent on maintenance in the course of one year.

In regards to income taxes though, you can try and estimate based on previous years, or, if you have fluctuating income, consider checking in with your accountant to approximate any taxes payable.

Because these expected are unknown, your guestimate won’t be perfect.

For each unexpected expense, write down an estimated annual cost.

4. Set Up a separate savings account.

The primary reason (aside from accountability) that budgets are effective is that they help to separate one lump of money, into more specific lumps of money.  

Imagine for a moment; your checking account has $5,000 sitting in it.  At a quick glance, you might feel like going on a shopping spree, but after considering your upcoming financial obligations, you’d realize the money has a purpose, only it’s tough to know how much is needed and where.

That’s where the budget is helpful.  It digitally separates your funds, giving them more specific purpose. For example, $1,000 might be needed for rent, $400 for a car payment, and so on.

To further ensure you create meaning with your money, physically separating money meant for unexpected expenses is beneficial.  And, because unexpected expenses don’t occur regularly, it’s best to move the funds saved somewhere else.

Consider setting up a separate savings account meant specifically for your unexpected expenses.

5. Then, Save Monthly Amounts

Again, using a car breakdown as an example, imagine I estimated $1,200 would be needed for the maintenance of my car.

Now, a $1,200 car bill certainly has the potential for financial derailment (depending on individual circumstances), but what about saving a mere $100 a month.  

Do you see what will happen?

Let’s assume that six months from now, I need to replace my car’s tires.  If I’m saving $100 per month, I’ll have $600 saved in six months.  The tires might be $400, leaving me $200 leftover, and no impact on my general cash flow.  

Does this make sense?

Instead of waiting to be hit with a big bill/expense, your breaking down savings into monthly amounts in anticipation of something expected.  So, no, I don’t know when my car will break down, but I could take an educated guess (based on history) and predict that it will.  Also, I don’t know how much it will cost, but I can do my best to estimate.

For each of your unexpected expenses, take the annual estimated amount, and divided by twelve to determine how much to save each month.

At the beginning of each month, transfer the monthly amounts into your separate savings account.  

The Bottom Line

Have you heard the saying “if you fail to plan, you plan to fail?”  It’s true you can’t make perfect monetary plans for the things you don’t yet know, but you can make financial estimates in anticipation of likely expenses. 

Property taxes were one such expense that would cause me stress each year, where in reality I had 365 days notice to save for the following year. Anticipating such expenses and making them smaller and more manageable eliminated vast amounts of stress from my financial life. 

Tackle your unexpected expenses by jotting down your best estimates and saving small monthly amounts.