The toughest thing about budgeting is that inevitably something unexpected happens that throws your careful planning completely out of whack.
Financial emergencies can sometimes be too unpredictable to budget for precisely, but you can still make plans to prepare for them by building a safety cushion into your finances. This is an essential financial technique, because unexpected expenses are just a part of life.
6 financial emergency examples
At some point, one or more of the following are likely to happen to you:
- Car repairs
Your car starts making a funny noise and you can only turn the stereo up to drown it out for so long. Eventually, it is going to need attention, and that's going to cost.
Even a routine expense like a set of new tires can cost you several hundred dollars -- possibly over a thousand dollars. A major repair like a transmission rebuild may run you closer to $2,000. If you need to completely replace the vehicle, the average new car costs well north of $30,000.
- Medical bills
As the cost of health insurance rises, many people are saving on premiums by choosing less comprehensive policies, opting for higher deductibles, or just skipping insurance altogether.
These choices seem like reasonable money-saving techniques, until you have actual medical expenses. Then they become financial sinkholes. If you need a trip to the emergency room, for example, the ambulance ride alone can cost a couple thousand dollars -- and that's even before you receive any treatment.
- Loss of work
If you lose your job or are otherwise unable to work, it can create a serious hole in your income for a long time. Even in a strong job market, the average stint of unemployment can last nearly half a year and, in weak job markets, it can be much longer.
- Home repairs
Owning a home means facing a constant series of repairs. Let's say you need a new roof. On average, that kind of repair can run you close to $7,500, and there are even more expensive things that can happen to your home.
- Computer failure
Just when you are comfortably taking your computer for granted, you get the blue screen of death and it freezes, flickers a couple times, and finally stares back at you with that blank, blue screen.
PCs aren't nearly as expensive as they used to be, but even a bargain brand will still cost you a few hundred. If you want something a little more powerful, expect a price tag up over $500.
- Phone issues
"I dropped my phone…" or, even worse, "I lost my phone" are words no one wants to say or hear. Of course, laptops lead fairly sheltered lives these days compared to smartphones, which accompany their owners to work, the gym, the beach, sky-diving… you get the idea. Smartphones lead a full life, but often a short one due to the beating they take.
These devices are so portable it's easy to forget what sophisticated, complex instruments they are -- until you see the price tag for a new one. Older models usually cost a couple hundred dollars, while the latest and greatest can push the price tag up to around a thousand.
How to prepare for the unexpected in life
Of course, the problem with planning for financial emergencies is that you never know when they are going to occur, or what form they are going to take. Still there are a few things you can do to prepare for the unexpected:
- Maintain a general emergency fund
An accessible savings account sufficient to cover basic expenses for about six months will not only help you survive a sustained gap in employment but should also be large enough to cover most unexpected bills that may arise.
- Build up an HSA
If your employer offers a High-Deductible Health Plan (HDHP), a Health Savings Account can help you save on health insurance by choosing the HDHP while also having a safety net of tax-deductible savings in your HSA.
- Anticipate replacement cycles
Don't wait till something breaks to figure out how to pay for it. You know you will have to replace your car or smartphone eventually, so add to a replacement fund steadily over time.
- Keep debt under control
If debt payments dominate your monthly budget and your credit cards are near their limits, you'll have little room to maneuver when the unexpected hits. Don't live on the financial edge, because the unexpected will push you over that edge.
Many things are beyond your control, but knowing how to prepare for the unexpected in life can help you keep uncontrollable events from throwing your finances completely off track.