Irregular expenses can throw off even the most well-planned budget. The air conditioning goes out in August. Your kid falls and requires a trip to the emergency room. The washing machine starts making noises that washing machines aren't supposed to make.
Maybe you'll have to scramble to pull together the cash, or maybe you'll dip into your emergency fund in your savings account--but neither option is optimal. If you have to come up with money on the spot, that's awfully stressful, and you might end up having to use credit to float you. If you have an emergency fund, that's good news, but do you really want to tap your safety cushion?
Preparing for the Unexpected
A better option is to set up targeted savings accounts, each dedicated for possible irregular expenses. For example, one account might be labeled "car repairs." Another might be "home repairs." After all, car and home repairs aren't really unexpected emergencies. You know they'll pop up at some point, it's just a question of when.
Stashing away cash for those irregular expenses allows you to save your emergency fund for major or unforeseeable expenses, such as a medical catastrophe or extended unemployment.
Building Savings Accounts for Irregular Expenses
Start by gathering your credit card and bank statements for the last 12 months. You'll use this information to make an estimate of all the irregular expenses you might have in the next year:
- List all of your irregular expenses, which might include automobile repairs, home repairs, doctor and dentist bills, etc.
- Add up how much you spent in each category. For example, maybe you spent $500 in the past 12 months at the auto mechanic. (Note: It's possible that you'll spend more or less than $500 in the next year, but evaluating your spending for the last year at least gives you a savings goal.)
- Now that you have a total for each category, divide each total by 12 to get a monthly expense. In the previous example, $500 in repairs means about $42 per month.
- Each month, contribute those amounts to the targeted account. For auto repairs, you'd put $42 in the auto repair savings account each month until you hit $500. You might even decide to keep going (for example, if you know your car's a clunker and might need more than $500 worth in repairs any day now), but the important thing is to put aside at least as much as you spent last year in each category.
If you can't contribute that much because there's just not enough wiggle room in your budget, there's little harm in setting up your targeted savings accounts anyway and contributing whatever you can. Saving some amount is better that saving nothing at all. Having dedicated savings accounts already set up makes it easier to increase your savings when you're ready.
Setting Up Targeted Savings Accounts
When looking for a bank, ask whether you can set up multiple savings accounts without incurring lots of monthly fees. Some popular online high-yield savings accounts will let you create as many sub-accounts as you want. You might also be able to nickname your account with its purpose--so rather than account #78043, it will be the "auto repair" account. It's a small thing, but naming your account will make the purpose of the money that much clearer and prevent you from raiding that money in a weak moment.
Also, try to consolidate your categories where it makes sense so that you don't have too many targeted accounts. Rather than separating auto maintenance from auto repairs, the two could be combined. Do keep irregular expense accounts separate from savings for wish-list purchases. For example, saving for a new car should be separate from saving for auto repairs and maintenance for your current car. One is an irregular bill, the other is a wish list or "want" item.
You don't know when an irregular expense will present itself or how much it's going to cost, but you can be prepared. By spending some time now to evaluate your spending, you'll start to see trends that can help you avoid, say, a burst pipe leaving you struggling to pay the mortgage or draining your emergency fund.