Budgeting For Unexpected Expenses
Fee-for-service financial planner and founder of PlanEasy.ca
Budgeting for the unexpected. Planning for the unplanned. It seems like an oxymoron, but it’s an important budgeting tool that can help you stay on track financially.
Unexpected expenses can be a real pain in the @$$. You can go months with a perfectly balanced budget only to have it blown out of the water by some unexpected expense.
Sometimes it’s car related, like a car repair, new tires, or annual license plate renewal. Or sometimes it’s home related, like a leaky sink, a broken window, a leak in the roof. Or sometimes it’s around the holidays when the gifts receipts are piling up.
Whatever the reason, unexpected expenses can be a real buzz kill. But are they all unexpected? Or can we budget for some of these expenses in advance?
A solid budget should include some room for these unexpected expenses. We’re not talking about adding “buffer” to your budget. Budgeting for unexpected expenses should be strategic and planned.
Many unexpected expenses fall into three buckets, vehicle related, home related, and life related.
Unplanned Vehicle Expenses
Unplanned vehicle expenses are a common complaint. Tires wear out. Oil changes are needed. Brakes need to be replaced. Things just wear out.
If you own a vehicle then you’re going to have to pay for maintenance at some point. It’s inevitable.
It could be something routine like an oil change or some new tires. But it also could be something sudden like a cracked windshield.
You might not be able to predict exactly what expense will pop up, but when you own a vehicle you can anticipate that something will happen on a regular basis.
The best way to budget for unexpected vehicle related expenses is to set aside a certain amount of money per month. How much you set aside should be based on your driving and the condition of your vehicle. The more you drive the more you should anticipate for unexpected vehicle expense. The older your car the more you should anticipate. Even the make/model of your car can have a big impact on expected expenses.
The CAA/AAA provides a calculator to help estimate maintenance and license costs by vehicle, but in general you can use $0.05 per km as a good guess. If you drive 10,000km per year then you should anticipate $500 in car related expenses.
To include this in your budget put $41.67 in a “Car Maintenance” savings account each month (Tangerine is awesome for this because you can create up to 9 savings accounts and give them all unique names).
On top of car maintenance, you should add license renewal fees. In Ontario it’s $120 per year. To cover these infrequent license fees add another $10 per month to your “Car Maintenance” budget.
As you have car related expenses you withdraw money from your car maintenance account. This way you’ll never be surprised by another car related bill (unless you get really unlucky).
Unplanned Home Expenses
Home repair is another very common unexpected expense. When you own a big asset like a home it’s inevitable that there will be some repairs. That could be a leaky sink, water in the basement, or just regular upkeep & repair.
Anticipating these costs individually would be very difficult, time consuming, and probably overkill. In general you can expect to spend between 0.5% and 1.5% of your home value on repairs each year. This varies depending on the age of your home, the current condition of your home, and how much you can DIY.
If your home is worth $350,000 after subtracting the land value* then you could expect between $1,750 and $5,250 in repairs each year on average. If you have a newer home, you might expect the average to be closer to the low end. If you have an old heritage home, then you might expect the average to be closer to the high end (or more!).
If you own a newer home worth $350,000 then you’d want to save at least $1,750 for home repairs each year. This is an average, one year you could spend less, another year you could spend more.
Setting aside $145.83 in a high interest savings account called “Home Repair” will help cover these infrequent expenses as they occur. (Again, Tangerine is awesome for this)
*In major cities land value could be a big part of the current market value of your home, so remember to subtract the land value from your total market value.
“Planning for the unplanned. It seems like an oxymoron, but it’s an important budgeting tool that can help you stay on track financially.”
Infrequent Life Expenses
Unexpected life expenses will vary from person to person. It entirely depends on your personal situation. These expenses may happen only once or twice per year, so they seem unexpected, but many of these expenses can be anticipated in your budget, at least in general.
For example, if you own a lot of expensive assets, like a cottage, boats, motorcycles etc then you can expect to have more unexpected expenses. Setting aside money each month in your budget for maintenance and repairs will be important.
If you have a large family with many birthdays or holiday gifts, then you might need to anticipate these infrequent expenses in your monthly budget. Estimate an amount for each gift and set aside a little bit in your budget each month to help avoid the sting during holiday season.
Maybe you have professional dues that are paid only once per year. Divide these by 12 and add them to your budget.
This is where tracking your spending comes in handy. You can look back at the last 12 months and find infrequent expenses that maybe need to be added to your budget.
Setup a separate savings account for each category. One for gifts, one for professional dues, one for toys etc etc. Then whenever these expenses come up you’ll already have a little pot of savings available and you hopefully won’t blow your budget ever again!
Financial planner, personal finance geek and founder of PlanEasy.