We’ve all been there – you’re suddenly faced with the problem of how to pay for unexpected expenses. Maybe you dropped your phone and a car immediately ran it over. Perhaps you underestimated how cold your apartment would be in February and your heating bill is way higher than normal. Or maybe you locked yourself out of your apartment and have to pay a locksmith.
Despite our best efforts, we simply cannot prepare for everything. But I don’t think that means we shouldn’t try (and if you want some tips on starting from scratch with your budget, check out this post). I’m going to share three main types of unexpected expenses and how pay for them:
How to Pay for Infrequent Purchases
These are the big purchases that you know you’re going to have to make, but never know when. Our phone suddenly dies, or our car starts making a funny noise. These sorts of things happen all the time, but it’s so easy to put off preparing for them – that is, saving.
Introducing the sinking fund. I didn’t know there was a name for this until I read about it in this post from The Financial Diet. I’ve been keeping a few of these on my budget for a few years now.
Tl;dr: a sinking fund is a category of money for purchases that you know you’re going to make, but don’t happen on a monthly basis. These purchases aren’t emergencies, more like important-purchases-that-aren’t-actually-emergencies. But that name was too long, so the name sinking fund was created*.
No matter what you call them, they’re unexpected expenses and you need to figure out how to pay for them. Functionally, you decide on a monthly amount to put away for a category of expenses and do just that.
Here’s a snapshot of sinking funds from my budget:
| Gifts | $40 | In our combined families, we have at least one birthday per month from April to November, then Hanukkah and Christmas happen, so we continually put money away for gifts |
| Phone | $20 | Based on the model of phones that I buy and how long I usually keep my phones, I did the math and, if I put $20/month away, I should have enough to buy a new phone outright when this one goes kaput! |
| Fun funds | $50 | My husband and I have combined finances, but every month, we each get $50 in spend-this-on-whatever-you-want money. |
The result is that, whenever I need to spend money in one of these categories, I know that I’ve been saving for it and can safely make the purchase. No more frantic Christmas budgeting in November!
A few quick thoughts on sinking funds:
- START NOW. Even if you don’t know how much you need, start putting $10/month away for it. Too often, we start thinking about saving for these expenses right when we need to make them. The best time to plant a tree is 20 years ago. The second best time is now.
- START SMALL. A sinking fund is no good to you if you can’t consistently save the amount. If you find that you have an unmanageable number of sinking funds, time to prioritize or downsize the goals for the ones that you have.
- NEVER STOP. Slow and steady wins the race with finances. If you’ve set a reasonable monthly amount for your sinking funds, you’ll barely notice tucking those dollars away every month, but when you go to spend them, you’ll be glad they’re there.
How to Pay for Variable Expenses
These are some of the more annoying surprises to get – your heating bill comes and it’s much higher than you expected (who knew that February can be so cold?) or you take your car in to get the oil changed and you realize it was also time to change the brake pads.
For most of these situations, the surprise was probably avoidable. If it’s an expense that you’ve dealt with before, you should have some information about how expensive it could be. Go back through your bank records and credit card statements and find the last time you paid for this. How much was it? Great, now save up (set a reasonable monthly amount, like in the sinking funds) and set aside that much money for next time it happens.
But what if you don’t know how much it’s going to cost you? What if you just moved across the world (hypothetically) and have no idea how much it will cost to heat a floor-level apartment in Berlin in the winter (again, hypothetically)?
You do what we do best these days: Google the living daylights out of it. Don’t go too deep down the rabbithole – you don’t actually need an exact answer. You just need a couple reasonable-sounding estimates and then you simply add half on top. Then, set that amount aside. Once you have more information about how much the expense will ACTUALLY cost you, you can pull the excess out of the fund.
Emergencies: How to Pay for Truly Unexpected Expenses
Ok, but what happens if something big happens? You’re locked out of your apartment and you need to get back in. How do you pay for THAT?
You put together an emergency fund.
Now, this won’t help you if you’ve googled and found this article and have no money set aside and need to pay for something right now. I can’t help you with that, unfortunately. Hopefully you have a support systems that can lend you a hand, but if you don’t, here’s an article on resources that might help you.
But if you’re not in a hair-on-fire situation right now and want to start thinking about taking care of the unexpected, the emergency fund is your friend. Current wisdom suggests setting aside 3-6 months of your actual spending for true emergencies.
WHOA. 3-6x your normal spending is a LOT of money. BUT. Figure out what your goal number is, pick a reasonable amount of money to put toward it every month, and save until you hit that cap. Then, whenever you find yourself in a situation where you need to pull month out of thin air, you can pull it out of your emergency fund instead.
*In case you were wondering, the sinking fund originated in 14th century Italian tax code to alleviate public debt, and the term originated in the early 18th century in Great Britain when such funds were created to reduce the national debt. Fun facts!
