Planning for Unexpected Expenses – Why it makes sense !
POSTED BY ON October 4, 2012 COMMENTS (35)
Have you ever heard someone say something like – “I had planned to buy a car from last 2 yrs and I was saving for it regularly with discipline, but I think I will have to delay my decision because some thing urgent and unexpected cropped up in between! . It happens all the time.”
Here are some more examples of “unexpected expenses”
- My Car Servicing had to be done urgently. I didn’t expect it to break this month
- My brother asked me Rs 1,000 more this month, I had to send that extra money this time which I didn’t plan for.
- My daughter had to see a doctor last week, and now suddenly this month budget’s gone for a toss!
- I was planning to buy Manish’s Book next month, but those awesome reviews forced me to grab my copy from flipkart today itself, I never planned to buy it ! .
95% people don’t plan anything. They just go with the flow. And for the rest 5%, who do any kind of planning; even their planning fails at some point of time because of a very simple and over looked factor in financial life, which is “unexpected expenses” . If you write down all your monthly expenses on a paper, do the total, and keep exactly that much money in your pocket… You can be very sure that you will have a really tight month! And that must be happening already !
These “unpredictable” expenses are very predictable
It’s because when we make any assumption, our conscious mind can only think about the bigger picture and we never deal with smaller details and mostly never count the uncertainties of life . We never consider that you might have to shell out Rs 2,000 on something which suddenly comes up (it can be anything). Suddenly there can be some trip, some eating out, some medical expense, some expenses related to the kids school etc. By now you must have realized that these unpredictable expenses are very predictable 🙂
I mean, you can always expect the unexpected. See each month, without fail, some thing or the other always crops up out of nowhere, your planning never fits the target , you are always short of what you were thinking earlier! , Sound familiar? Life is so unpredictable, that it’s a great idea to factor that “unexpectedness” into your planning. When you do your monthly budgeting, have a “Unexpected Event” category too, and allocate some money for that anyways, because it will happen 🙂
But its anyways taken care , so why Plan for it ?
If these unexpected events happen a lot in your life, you will agree that the money you need to shell out is not the big issue, rather the real issue is the psychological nonacceptance and your irritation every-time it happens. You have not mentally prepared yourself for those expenses and every time they happen, its like a pinch on your face! You didn’t think about it and now it’s in your life, staring you in the face. To overcome this issue, you need to create that unexpected expenses buffer. Once you’ve done that, you are mentally ready to expect something unexpected and when you need to spend money for it, you know it will come from your “unexpected event” account.
If nothing happens, you can always use up that buffer for your other expenses, its like a bonus for you. On the similar lines, Ramit Sethi of iwillteachyoutoberich.com talks about the Stupid Mistakes Account, which is for the same concept of planning for unexpected expenses.
Keep buffer even in your investments
The same thing applies to your investments also . If you are planning for a goal which is going to come after 6 yrs, better plan for just 5 yrs and keep 1 yrs as buffer. If you are assuming a 12% return , better plan assuming 11% only , and keep 1% as buffer , if your SIP amount needed for a goal is Rs 5,000 , better invest Rs 6,000 instead of Rs 5,000 . This way , the chances of the final outcome fitting into your expectations is much higher!
What do you think about it?
Even he is not sure…Requires money in hand in next 2 and 10th year for kids marriage..
In that case divide the money in 2 parts, one is FD (after 2 yrs) and rest in FD or Balanced mutual funds (after 10 yrs)
Hi Manish,
A person retiring at age 58 years with retirement fund valuing Rs. 11 lac wants to invest. Which are the best products/ option he can put the amount in for short-term i.e 2-5 years. Gold biscuit worth Rs. 4 lac has been bought. Not keen on property investment.
Thanks
What is the requirement ? Is it capital appreciation or income generation !
One simple solution, to meet unexpected expenses – Take FD in bank (ie, savings) and take OD(over-draft) loan over that FD. Thats it. One shot, two birds. Draw money from OD account when needed. Deposit the amount back once you have.
Thanks for that tip
i THINK, everybody is becoming Emergency phobic now a days. well I do not believe you need to keep planning for unplanned things(only government of India is capable of Doing This Sic.). I think 6 months expenses is more than enough.
In any case you can not keep building up various moats around you for all possible impacts, you will then become a sitting duck when you yourself want to get out of one….
So i feel plan for 6 months expenses & do not stop living today for that one extraordinary bad which might come…
All are unexpected in life, by saving money from our income and planning some what can try or match the unexpected but also its very hard to draw in our life….If all the things happening in life are as planned then our effort is given as input is no precious as the result is known to us , and also if happens like that common people will not think of GOD.
Thanks for your comment
commen sense article manish, most of times i am able handle my expense but see close relaitive always struggling with the UNexpected. i used to wonder why and then realises that the dont think in advamce even for normal emergencies (if there are things like that) or big shock events. i try to keep a buffer amount that i have saved up for things that crop up. but a recent medical emergencies made me get support form friends and family also. so what ever we are prepared for, make sure that people around u are also prepared, so in times of ones need many can pool in and help out
Thanks for your comment .. thanks for acknowledging that its really an issue 🙂
extra money with u (saved and not looted), more marks scored in any exam, driving slow and talking less may or may not help u, but can never harm u.
just be a habitual less spender and life is heaven here on earth only
Short and strong message !
thanks
Manish, this is so very true. Though I plan that with the current saving potential I could easily reach the expected target within an year, but at the end it never happens. Now if I look back, in my total 5 years of work experience, I have not reached the desired financial position as I had dreamt it, even though my salary hikes were decent. I know this problem is for majority, but this is a problem. Reason could be mix of many things – unexpected expenses,inflation, poor strategy of investment avenues,etc.
And a big issue is your expectations without considering the unexpected things which come in betweem , which will make sure you never reach your target, because its flawed !
I have initially thought keeping the credit card would serve me emergency. But then realized that it is not always that you can time max period benefit of 45-50 days. An emergency could strike any time and realized that credit card is not the best way to prepare for an emergency.
For the last 5 years this is what I did and never faced any problem. I maintained 4-5 months salary always in the savings account and could balance irregular spikes in expenses well. The pinch is never felt so far so much so that my credit card usage has come down to minimal. If any dent in the principal amount due to sudden expenses is seen, it is invariably filled back with bonus and other benefits besides the salary. The emergency fund concept which every genuine financial planner advocates is wonderful idea indeed.
Thanks Krish ! .. always see credit card as an extra and the last option for emergency situation
Hmmm.. when I started reading this, felt like I am not the only one 😉
Every month there is something or the other which just pops up from nowhere and you have to shell out that planned-for-something-else money out…
Sometime back, I was getting frustrated with where is all my money going, I am not gamling, I dont drink, dont have a ‘very’ luxurious life spending on just about anything… and then I started noting down every single expense in a money manager… aha.. that’s where I found out that adding in small bits how does it turn into a big amount..
But yes, you have got a point here.. buffer really helps in this case, at least to have your own peace of mind.. 🙂
Yea .. once you track things , you exactly know where is it going, but its damn tough !
I couldnt help but smile when i read the post, i mean what you have written is nothing eye opening , its simple common sense, yet it has so much value, these were things even our great grandfathers used to do/think, but its just that our current generation has forgotten about it… 🙂
Thanks for the kind words Suhas !
Except for the 5% people who are able to plan out each and every event, I guess rest of the people do need to find a way to tackle this but how ? There are three things I follow to take care of unevenness in events on a monthly basis.
1. Under-estimate your income – salaries, equity trades, other business income
2. Fully estimate all expenses and likely losses – EMIs, insurance premiums, trading losses, other business losses.
This way you will always have only positive surprises, whether it be lower expenses or higher incomes.
The third and most important thing is how do you plan all your ‘unexpected mostly cash’ expenses since all EMIs, account debits, credit card expenses etc. an be easily accounted for. A simple thumb rule I follow is to look at the past few months of ATM withdrawals in your account. The true power of mathematics and trends is that a person’s expenses over a period tends to normalise however uneven the pattern we may think it is.
So, your cash expense would equal total cash withdrawals and this includes sudden dinners, short trips, medicines, impulsive gift purchases, groceries, cosmetics etc. At least for me I have found that this is unerringly giving a rough expense figure + or – a very small tolerance.
The most important part of the above is that you really do not need to plan so much at details but can work from a higher plane without even planning for specific expenses.
This has worked for me, why don’t you give a try…
Thats a very good way to expect the expenses ,thanks for the tip !
Its a true fact..every month there occurs some unexpected expenses mostly on festivals which almost comes every month in our country so one needs to b ready for it n keep aside a amount 4 it..
very nice article manish…
Haha .. good one vijay !
Its a true fact..every month there occurs some unexpected expenses mostly on festivals which almost comes every month in our country so one needs to b ready for it n keep aside a amount 4 it..
very nice article manish…
Medical emergencies are the most invitable unplanned thing which can eat away all our savings otherwise few hundreds here & there are in everybody’s life.
Hey Manish your articles are always act as eye opener.
Thanks a lot!
Thanks Abhijit !
Yes Manish, this is the case which happens with almost everyone, life is full of uncertainties & one can’t avoid them, just plan for them considering the worst case scenario. The game is all about saving some amount as liquid cash, apart from your investments & then out of that liquid cash, classify it further in 2 categories: 1st part in bank & 2nd part in your home for emergency. After the month end, if there was no emergency, then transfer that fund again in the bank account. For eg: if I earn 45K, I’ll take out 20K for my monthly expense, 10K in the monthly investments & remaining 15K will be divided in 10K & 5K. Park that 10K in a bank account as liquid cash & 5K as emergency fund at home. You can also do it like splitting that 10K in 5K-5K, as 1st 5K in bank & 2nd 5K for your plan of buying something big. So in case there is no emergency, you will save 7.5K per month as liquid cash & 7.5K per month as fund to buy that BIG THING, as at the year end you would have two groups of 90K. In this way, you are able to achieve lots of things like:
1-Save money for your investments
2-Save money for emergency
3-Save money for some big expenses for a family which can be anything like buying a home appliances or a vacation.
So to conclude, being disciplined & saving regularly every month leads you to a good financial life which itself enables you to be FINANCIALLY SECURE & INDEPENDENT.
Great point .. I agree with you .. I am not sure how much splits should be done for the saving part , because one should not complicate it too much too 🙂
Hahaha Manish that splitting was just an example, the basic point is one should have the clarity of incoming money & its proper utilization for planned & unplanned events.
Yup !
Hi Manish,
What do you think should be the % of salary kept aside for this type of expense?
Thanks,
Ram
Ram Mohan .. There are two kind of unexpected things which can happen
1. One time basis , some part is already covered by emergency . but having another category as unexpected expenses will be good ,these can occur 2-3 times in a year . NOte that we are not talking about emergency situations , but regular things which keep happening , but we dont account for them
2. Then there are monthly level of unexpected things , which we know CAN HAPPEN , but its not part of our budget .