While visiting my family in Germany, our freezer decided to break down. It was ironic to happen when our handyman checked our dishwasher and shortly afterwards, there was the new freezer. After 21 years, it’s a well-deserved retirement. For my mom, it meant an unexpected and unplanned expense. Luckily for her, she had set some money aside for these events.
We don’t know what the future holds but we can prepare ourselves for the unexpected. Here are the latest tips to start your own preparations for unexpected financial expenses:
- Make a list of the possible unexpected expenses. Here are just a few examples of what you may encounter:
- If you have a large family or circle of friends, gifts can become expensive. Look at upcoming birthdays, weddings, Christenings and so on. Will you exchange presents at Eid or Christmas? Create a list of who should receive a present and determine the budget. To keep costs under control, have you thought of a group present or a gift exchange where you draw a name and only give a present to that one person?
- If you’re driving a new car, the warranty may cover car repairs. But if your car is a bit older, take care of it and put some money aside for repairs. A new alternator is not cheap…
- Anybody who ever owned property knows how home repairs or improvement projects can take much longer and require more funding than originally anticipated. Get a quote before choosing the contractor. You know how much you’ll need to pay and if it’s not an urgent and necessary repair (e.g. broken water pipe), you can save for it. A rule of thumb is to save 1% of your home value per month.
- Medical expenses, especially voluntary treatment, can add up to large amounts, despite having medical insurance. Ideally, schedule regular and preventive checks. Living in a region whether health care providers like to conduct more tests than necessary, challenge your physician whether the treatment is truly necessary. For example, if you have a broken arm, do you really need an MRI?
- Sit down and create a budget. If you don’t have a budget yet, write down your expenses for a week. It will give you an idea how much you actually spend. As a next step, decide for what you spent your money and categorise it (e.g. mortgage/rent, groceries, transportation, clothes, education). Look at your spend from the last week and calculate a monthly amount. If you’re paid bi-weekly, you may want to adjust your budget to bi-weekly amounts.
- Track your spending. When you pay for something, regardless of it being with cash, debit/credit card or cheque, write it down. At the end of the month, you can compare your spending with your budget. If you’ve spent more than you’ve budgeted, review the reason. Was your budget set too low or have you spent more unnecessarily?
- Pay yourself first. This is such a basic principle and yet, so many don’t do it. If you wait until the end of the month, chances are there’s no money left to save. Set up an automatic transfer for the amount you’d like to save. Transfer the money into your savings account on the same day as your pay day.
- Put some money aside for foreseeable and unforeseeable expenses. Make saving for these as mandatory as saving for yourself. If you know your car will need to go through the annual inspection in October, set money aside for it in prior months. Saving AED 500 ($136) for 6 months is a lot easier than paying AED 3,000 ($816) in one go.
- Build an emergency fund. This one should cover 3-6 months of your living expenses. If you’re facing the loss of an income, an emergency fund will help you bridge the time till your new employment.
These are just a few tips to get you better prepared for unexpected expenses. What changes are you making today to be in a better position tomorrow? Leave a comment with your own action plan.
Until next time,