A lot of times, our plans for getting our financial life on track and get out of debt and all of these lofty, but very attainable goals get derailed because of what we call an unexpected expense. Emergency funds are supposed to be for our unexpected expenses so we don’t have to put them on a credit card and drive ourselves deeper into debt if something happens.
However, there is a downside to that.
When an unplanned expense occurs, it’s great that we are able to use an emergency fund to take care of that. This does still have a negative affect on our expenses, though. Reason being is that we still need to take the time to rebuild our emergency fund back to where we had it before. This still takes money away from paying off debt for potentially a number of months. And if you have debt with interest, you know that anything more than a month is potentially a good amount of money you are losing to interest.
Now the situation above is still much better than not having an emergency fund and placing whatever unplanned expense you experience on another interest bearing credit card. But in order to avoid having to rebuild your emergency fund after paying for an unplanned expense, there may be another solution.
What if we were to redefine what exactly an unexpected expense is?
There are certain expenses in life that we consider unexpected but most certainly should be expected. For example, maintenance on cars or homes, yearly expenses, and even medical expenses should not considered unexpected.
You know the saying “life happens?” Why are we surprised when it does?
The ideal situation would be to set aside an emergency fund to pay for actual unexpected expenses and then set aside other funds to pay for recurring expenses that should be expected so we are not taken aback when something happens.
In order to shift our mindset, let’s examine a few of the top “unexpected” expenses and see why they should be expected.
What happens when your fuel pump on your car goes out? According to the cars.com RepairPal Price Estimator, it would cost between $612 – $877 to replace the fuel pump on my 2010 Chevy Malibu. Now if you are going through a program like Dave Ramsey’s baby steps and you are just starting out, then you probably only have about $1,000 in an emergency fund right now. There’s a good chance this “unexpected” expense would wipe almost all of that out! Then what? Then you rebuild.
What if you get a home expense that same month? Say your Air Conditioning unit goes out? Even a $1,000 emergency fund wouldn’t cover that cost!
Now I’m definitely not trying to be a downer, but do you see what I’m getting at here? These expenses should be expected because it takes work and money to maintain things like vehicles and homes.
What to do Instead
For vehicles, depending on the age of your vehicle, setting aside $50 a month specifically for repairs will go a long way. There will be some years that you won’t be spending anything on maintenance and some where you have a big bill.
Keep in mind that you shouldn’t be taking money out of this for oil changes as those are necessary and not for when something breaks down. If you are buying a new vehicle, setting aside $50 a month will potentially give you up to $1,800 by the time the warranty on the car expires.
For Homes, experts suggest setting aside 1% of your home’s cost on a yearly basis. So for a $200,000 home, you would be setting aside $2,000 a year, which translates to about $167 a month. Just like with vehicles, if your home came with a Home Warranty for the first year, this is a great opportunity to save as you are guaranteed to only spend a couple of hundred dollars if something major goes wrong.
Many people view any type of medical expense as unexpected. The reality is that even if we are in great health, we are bound to get sick at some point. So why not plan for it?
What if you have a rough year and everyone in the family gets sick, has to go to the doctor, and get an expensive prescription? Depending on what type of medical coverage you have, you may have to completely pay your deductible before any type of insurance coverage takes over. This has the potential to eat up any emergency fund you have, and then some.
What to do Instead
A good rule of thumb would be to set aside enough money each month to cover your yearly deductible. Dividing your yearly deductible by 12 will give you a number to shoot for.
For example, if your deductible is $3,000, you will want to set aside $250 each month to save for potential medical expenses.
The variations in healthcare plan types and deductibles also affects how to handle medical expenses moving forward as well. For instance, if you have a PPO, a type of plan that generally has a higher premium but covers more money up front, you may be set with just saving up one year’s worth of deductible and then not needing to save after that since you know you will generally be covered for most medical situations. If you don’t use it for the year, you can just leave it for next.
If you have an HSA plan that has a lower premium but usually doesn’t cover anything (but wellness) until after you’ve completely paid your deductible, you may want to continue saving each month and each year whether you use it or not.
One last thing that my family did when we made a switch from PPO to HSA at the beginning of the year is set aside pretax dollars to go into our HSA. Since the PPO premium was $160 more a month than our HSA premium, we are putting that $160 in our HSA each month (pretax!) to continue to provide the buffer. We won’t be missing the money on our paycheck since it was going toward our premium before anyway.
Vision expenses would also fall in this category. It is recommended that we see an eye doctor one a year so this should not be considered an unexpected expense.
So What’s a Real Emergency?
Real emergencies are things like a job loss or maxing out what your health insurance will pay due to some genuinely unexpected medical condition. It should not be things like annual expenses, normal medical issues like flu or sinus infections, property tax, or home or car maintenance. These are all expenses.
The last thing that I want is to have to use my emergency for what should be a totally expected expense only to lose an income the next month and not be able to make ends meet.
One Last Thing To Consider
Something to consider with this is that some may feel comfortable saving more and some may feel comfortable saving less. Based off your monthly income to expense ratio, you may be able to weather a larger expected expense than others. If you feel comfortable only setting aside, say, $25 a month instead of $50 for car expenses because you have an extra $1,000 a month already, then by all means only set aside $25.
The only thing to consider with that is to make certain that your job (and your spouses job, if you’re a two income family) is secure. You may not always have that $1,000 extra a month which means you may be relying more on your emergency or expected expense funds to help shore things up.
Either way, redefining what an unexpected expense actually means will help your financial situation tremendously. I want to do all I can to prepare for what may happen so I don’t lose traction if it actually happens.
What do you consider an unexpected expense? What is expected to you and what do you do to prepare for it?
I’d love to hear from you!