While you likely know the importance of
budgeting, some expenses are easier to account for than others. Your mortgage, your electric bill and your cellphone bill, for instance, consistently arrive every month. And though it’s easy to plan ahead for these costs, it can be harder to factor in the cost of a root canal that your insurance carrier won’t cover, or new tires after a blowout on the highway.
draining your budget and leaving yourself in a bind in the event you need to pay unanticipated expenses, follow these three expert tactics.
1. Create an emergency fund.
There are two types of unfixed expenses: the kind you know are coming, like birthday presents and getting your oil changed, and the kind of expenses you don’t know are coming, like having to buy a plane ticket to go see a sick relative. And there are also variable expenses, which include things like your grocery bill or gas costs, which probably change from month to month. The emergency fund can be a lifesaver for unfixed costs for which you haven’t planned.
“To build an emergency fund, I’d recommend setting up automatic contributions directly from your checking account the day after you get paid,” says Levi Sanchez, a co-founder and financial planner at Millennial Wealth, a financial planning firm in Seattle.
How much should be in that emergency fund? According to Sanchez, you should set aside as much as possible. “Typically, it’s suggested to hold between three to six months’ worth of living expenses in an emergency fund, which should be opened in a high yield savings account,” he says.
If you have no emergency fund, three to six months of living expenses may seem daunting. But many experts recommend starting small, with $50 or $100 a month and any money saved up. Even if you can only stash away a week’s worth of living expenses, padding your fund is better than taking no steps. On the plus side, if you put away money every month for years, and there are no emergencies, eventually you will have three to six months of living expenses saved, or even more.
2. Balance your budget like a pro and complete some financial forecasting.
Budgeting regularly is important if you want to keep track of what money is coming in and what is going out of your account, but it’s imperative if you want to not be surprised by unfixed expenses. Many financial experts recommend using online financial software programs like Mint, Acorns and Mvelopes. But more than keeping track of how often you budget, it’s paramount to budget strategically.
Still, for those unfixed expenses you know are coming, like having to buy a daughter’s prom dress or holiday gifts, it’s key to plan ahead, according to Jill Emanuel, a financial coach with Fiscal Fitness Phoenix in Mesa, Arizona. Emanuel offers up the example of your car, which will likely require repairs at some point. She says that you should start asking yourself questions like, “How old is the vehicle? What likely 10 Foolproof Ways to Reach Your Money Goals.] maintenance or repairs are going to be due soon? How reliable is the vehicle?”
She advises conducting an internet search to get an idea of how costly certain repairs are for the make, model and year of your car. Then, “total up all of these estimated costs, divide by 12 and put that amount into a designated savings account for car repairs. That way, when the car does break down or need a repair, the money, or at least a good portion of it, is already sitting in the bank to pay for it.”
It may seem like a nuisance, especially if you tack on other upcoming probable expenses like a new roof, a new heater, a new lawn mower and so on, but it’s better than having to scramble to find that money quickly at a later date.
3. Consider opening a home equity line of credit.
If you have equity, it could be advantageous to open a home equity line of credit, a line of credit that is similar to a credit card in that you can max out the line or borrow money and then quickly pay it back. The main difference is that you’re borrowing money from the equity you’ve built up in your home after years of making mortgage payments.
“A home equity line of credit, or a HELOC, allows you to leverage your equity to cover your needs,” says Lauren Klein, a certified financial planner and the president of Klein Financial Advisors in Newport Beach, California. However, she cautions that this isn’t as helpful of an option as it used to be. “The interest is no longer deductible under the new tax law.”
Given that a home equity line of credit operates like a credit card, you might wonder, why not just use a credit card for unfixed expenses instead? You can, but if you can’t pay back the full amount right away, it may pan out better for you to go with the HELOC. The interest rate for a home equity line of credit is generally considerably less than a credit card. It’s often under 5 percent, whereas a credit card typically would be about 16.94 percent. For instance, currently, a U.S. Bank Visa Platinum Card has — after a 0 percent intro APR — an interest rate ranging between 11.49 and 23.49 percent, but it’s advertising its HELOC APR rates as being between 4.10 percent and 8.70 percent.
However you deal with unfixed expenses, in many ways the problem isn’t the unexpected costs — it’s that you allowed yourself to be surprised, according to Klein.
“If you own a home, plan to spend about 1 percent of the value of your home each year in 12 Ways to Be a More Mindful Spender.] maintenance and repairs,” Klein says, adding that if you own an older car, you’d be remiss to not assume that you’re going to have expenses keeping that going as well. “I often remind my clients that there’s really no such thing as an unexpected expense,” Klein says. That’s why it’s key to plan for the unexpected.
[See: 15 Little Things That Impact Your Finances.]
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3 Ways to Deal With Unfixed Expenses originally appeared on usnews.com