Murphy’s law states that anything that can go wrong will. That isn’t always the case, but flat tires and leaky roofs are rarely predicted. Matt Becker explains how he readies himself financially for life’s curveballs.
Like any good Grownup trying to do Grownup things, I have a plan for my money.
It’s not a budget (I’m not a fan of budgets), but it is a system that allows me to be purposeful with my money so that I can use it to get more of the things I actually want out of life.
But sometimes life plays the role of the joker, taking my little plan and shuffling in a wild card. It throws something like a broken car door or a cat with a urinary tract infection my way (yes, really), expenses that don’t fit neatly into a monthly plan and have the potential to bankrupt my entire system.
Luckily, I have an ace in the hole.
See, though I don’t know when these irregular expenses are coming, I do know they are coming. And instead of simply waiting for them to raise the ante, I have another little plan that has me prepared at all times.
Here’s how it works:
Step 1: Track
The first step to preparing for the unexpected is learning to expect it.
I use Mint.com to track all my spending. Once a week, I log in to categorize my recent transactions, grouping all my spending into categories like:
- Groceries/Household Items
- Eating Out
I try to keep each category specific enough so that I will know how to take steps to improve my habits there, and broad enough that I’m not separately tracking every single item we buy at the grocery store. All in all, I have about 35 different categories that I track.
Then, once a month, I pull out a summary of my spending by category for the previous month and put it into a spreadsheet next to the previous months’ summaries.
That spreadsheet lets me keep tabs on my various spending habits to make sure they’re aligned with my long-term goals. But it also shows me very clearly what my most common irregular expenses are and how much they’re costing me.
For me, those big irregular expenses tend to fit into one of four categories:
- Car repairs
By tracking my spending over time, I can identify what those irregular expenses are and how much I typically spend on them over the course of a year. Though my month-to-month spending on these items is highly variable, my total annual spending tends to be a little more consistent.
Knowledge is power, and this knowledge gives me the information I need to put the next step into action.
Step 2: Automate
Once I have a ballpark annual amount for each type of irregular expense, I set up an automated system that prepares for them ahead of time.
For each expense I take my annual spending amount and divide it by 12 to get an average monthly number. For example, my wife and I found that we typically spend about $3,000 per year on travel (this was before we learned about travel hacking). So while we certainly don’t spend on travel every month, over the course of a year we average about $250 per month on travel expenses.
Then I open a separate savings account for each irregular expense. I use Ally Bank for this, since it’s super easy to open new accounts and manage them all in one place. You can even name your savings accounts after each goal you’re saving for, which makes it easier to keep track of everything.
Finally, I take that average monthly spending number and set up an automatic savings transaction that moves that amount of money into my dedicated savings account on the same day every single month. So, for my travel account, that means that $250 is leaving my checking account every month and going into my dedicated travel savings account. With those automated transactions in place, these irregular expenses are now just a part of my regular plan. I’m accounting for them just like I do my monthly bills, even though I never know for sure exactly when they’re going to come up.
Step 3: Spend
Here’s the best part: Now, when my wife and I decide to take the kids to Disney or my car door breaks and needs to be replaced, we already have the money in a dedicated savings account ready to handle it.
No panic. No surprise. No rearranging the budget. No putting it on the credit card.
I just pull the money out of my savings account and spend it. Simple as that.
Preparation = Freedom
Now I’ll admit, this system isn’t perfect. If I have two big car repairs back to back, I may not always have enough money in my dedicated “car maintenance” savings account to handle them. And there have been plenty of trips I wanted to take but couldn’t simply because my “travel” account wasn’t big enough.
But over time, the consistency of saving ahead for these expected but irregular expenses has given me a lot of freedom.
It’s allowed me to stay on track with my biggest goals, like starting a business and saving for financial independence, even when life does its best to trump my plans. It’s allowed me to take some trips I couldn’t have otherwise afforded because I saved for them ahead of time. And it’s relieved a lot of stress, because I’m not constantly worried about the next big expense that could send me into a downward spiral.
Good or bad, I feel like I’m ready for pretty much any hand life might deal me.
How do you plan for the unexpected, Grownups? When was the last time you had to deal with an unexpected expense? What did you do? Share your feedback by leaving a comment.
Matt is the founder of Mom and Dad Money,
a fee-only financial planning practice
dedicated to helping new parents build happy families
by making money simple. His free time is spent jumping on beds
and building block towers with his two awesome boys.