Don’t Let Big Expenses Surprise You
Posted on June 16, 2006
Have you ever found yourself rocking along making all your payments on time and feeling that everything was going well only to be surprised by a big expense you weren’t prepared to pay? If so, you’re not alone. It happens to people all the time and often causes them to incur unwanted debt to solve the problem.
These are often expenses you simply have forgotten about. Items like insurance, property taxes, new tires for the car, and other such things are examples of annual or otherwise irregular expenditures that often catch people by surprise. Home or car maintenance, unexpected medical expenses, broken appliances or damage from accidents are other examples of these kinds of expenses.
I can remember what it was like to plan a vacation or to purchase something I really wanted when I had a little extra money in my checking account, only to be disappointed and frustrated when I had to cancel my plans because of an unplanned expense that cropped up. The key word here is “unplanned.” That was the problem; I wasn’t planning for these irregular expenses. I kept being annoyed by these unwanted surprises until I finally decided to do something about it. What I did turned these financial crises into normal everyday occurrences and allowed me to improve my finances dramatically. I couldn’t eliminate the expenses and neither can you, but we can plan for them.
We all have large annual or semi-annual expenses like the ones mentioned earlier. We all have unexpected expenses that crop up. So how do we plan for them?
Here’s a tip! Get a sheet of paper and list all of the large expenditures you expect to have to pay during the year. I’m not talking about things like house or car payments or other monthly expenditures. I’m talking about expenses you only pay once or twice a year. Some of these you may not even know the exact amount and will have to use an estimate. Don’t forget to add an item called “unexpected expense” to the list. Beside each item except “unexpected expense,” list the due date when you will have to pay it next.
Once your list is made, take the amount of each expense and divide it by the number of months remaining before it becomes due. This will give you the amount you will need to save each month in order to pay the expense when it comes due without having to borrow. “Unexpected expenses” are just that, so all you can do is set aside an amount you feel comfortable with and let the money accumulate. When an unexpected expense does arise, the money you have saved is money you won’t have to come up with at the time.
After determining the amount you will need to save each month to meet your obligations as they come due, the next step is to open a separate bank account and deposit this amount into it monthly. Think of it as your escrow account. This accomplishes several things. First, it removes the funds from your regular checking account so they aren’t commingled with the money you use for monthly living expenses. Second, it builds up a savings account from which you can transfer money to pay the big expenses when they come due. Third, it helps you avoid charging these big expenditures to a credit card or other expensive form of financing. Fourth, it puts all of your expenditures on a monthly pay basis. Fifth and most important, it forces you to live within your means or at least lets you see your shortfalls long before they become financial disasters.
When you first start using this tip, you may find that some of your yearly expenses are due in only a few months. This will require you to set aside more than one twelfth of the expense each month. This will increase the monthly amount you have to deposit to your escrow account, but saving a year worth of expenses in 4-6 months is easier than having to come up with all of it in a month. As each expense is paid, you can reduce the amount you are putting into the account to only that amount that will be needed by the next due date.
One way or another, you will have to pay the big expenses. If you think it is hard to save 12 months worth of expense in 4-6 months, just think how hard it will be the next year if you have to finance it and then pay off last year’s expense, with interest, plus the added cost of the current year’s expense. When you put this tip to work, you will find that the longer you use it the easier it gets and those big expenses will no longer be a problem. You’ll also feel more in control of your finances and become more financially secure.
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