Unexpected expenses are, hands down, usually the biggest budget breakers out there. (An unexpected expense is anything that you did not foresee or plan for in your budget.)
A clinical look at all cash flow for three full months, including all income and expenses, is one of the first exercises we conduct when working with new clients. During this time, it’s fairly common to look back and see some months where expenses exceeded a client’s income. This is called negative cash flow.
I can’t count the amount of times where clients have looked at these numbers before simply declaring that it wasn’t a typical month. If you really think about it, though, what is a typical month? In our experience, months without unexpected expenses are the ones that are somewhat atypical.
When you start to create a budget, there are four categories to forecast: Fixed expenses are any bills where the amount is set for at least a year – mortgage payments and your insurance premiums fall into this category. Semi-fixed expenses vary to a certain degree, like your gas and hydro bills, but still need to be paid throughout the year. Discretionary expenses are usually point of purchase items, including gas, groceries, dry cleaning, etc. Entertainment – any spending you do at restaurants or at the movies, for example, also falls into the discretionary expense category. Finally, we have a category for unexpected expenses.
This last category is the hardest to plan for. These expenses don’t occur every month, and each one is different from the next. A new roof, regular vet bills, a milestone occasion party, new winter tires, and college text books for a child, are just a few examples. The good news is you can probably, accurately predict 90% of your “unexpected” expenses if you sit down and really brainstorm.
Now of course, there are some expenses that can’t be predicted: An unexpected vet bill because your dog ate two pounds of rum balls, or a car accident insurance deductable are two examples. You should have an emergency fund set up to cover incidents like this.
The difference between an unexpected expense and an emergency is that unexpected expenses can be predicted, where emergencies cannot. Even the need for a new furnace can usually be anticipated. If your furnace is as old as the hills, chances are that you will need a new one in a couple of years and should start setting aside money in an unexpected expenses account.
How can a Personal Financial Trainer help?
Unexpected expenses can be a disheartening setback to anyone who has experienced them. They can throw you off track, and cause you to give up on your efforts to achieve financial balance.
A Personal Financial Trainer has the experience to look at the bigger picture, and help you plan out your unexpected expenses for the next year. This will ensure that you stay on target to reach your financial goals. You will have the confidence to keep going because you know your financial terrain. You will be well equipped because you can see the unexpected coming from a mile away.