Unexpected expenses are one of the biggest reasons why budgets fail. These budgeting techniques will help you plan ahead so that you’re always prepared when unexpected expenses arise.

Have you ever had one of those weeks where it feels like everything hits you all at once? 

I recently saw a story about a woman who had to take her dog to the vet and it ended up costing $400. Then on the way home her car overheated. Between the tow, repairs, and car rental, it was another $1200. And on top of it, she got home and found a busted pipe and water all over the floors. 

Luckily, she had been building up an emergency fund to help pay for some of these expenses. But even if you have enough saved, it’s disheartening when you’ve worked so hard to build up your savings and it quickly disappears due to circumstances beyond your control. 

Understandably, this woman wanted to know how to plan ahead and prepare for these expenses so that it’s not so stressful and doesn’t have such an extreme impact on your finances. 

The Key to Budgeting for Unexpected Expenses

The key to budgeting for unexpected expenses is to plan for unexpected things to happen. This may seem a little crazy—how can you plan for things that you don’t know about? 

But if you think about it, few things are truly and completely unexpected. With many surprise expenses, you do have at least a general idea of what the possibilities are. 

For example, as a homeowner, I know that things are going to go wrong. I have no idea what it will be—a tree falling on the roof, the water heater breaking, the drain backing up, an electrical problem, etc. But I feel pretty confident that something WILL happen at some point. That’s just the reality of owning a home (particularly an old home). 

Here are a few more examples of “surprise” expenses that you can anticipate to some extent:

• If you’re in a stage of life where people are getting married and having babies, you can anticipate that you might be going to weddings and baby showers in the near future, even if they haven’t been scheduled yet. 

• You might not know exactly what medical care you and your family will need over the course of the next year, but you could make an educated guess based on previous years. (Catastrophic medical conditions/emergencies count as one of those truly unexpected things that nobody can reasonably anticipate.)

• If you’ve had your car for a while, you can expect that you might soon be needing new tires, some maintenance, or even a new car. 

• If you’re a parent, you know that there’s a good chance your kid will need child care on days off school, decide to sign up for (expensive) activities, suddenly need bigger clothes, and more. 

The key is to identify what unexpected expenses are possible or likely and to start setting aside money for those now. Even if you don’t know the timing or exact amounts, you can still make an educated guess. 

Wouldn’t you rather plan ahead and have 80% of the money saved than having nothing saved at all? 

Isn’t my emergency fund supposed to cover unexpected expenses? 

Emergency funds are a critical part of building financial stability and being able to survive when the unexpected happens. But they are not enough. 

Emergency funds are really designed to protect you from truly catastrophic events that sacrifice your ability to earn income and/or pay your bills. This includes things like job loss, significant medical events/conditions, and home repairs beyond what you could reasonably expect. 

They are not designed to cover all of those more regular surprises that happen in life. (A friend’s wedding or a tree needing trimming are NOT emergencies, for example.)

Certainly, you can put extra money in your emergency fund and use that to pay for all of these things. While some people successfully use that strategy, I find that there are often two things that go wrong:

1. People don’t have a big enough emergency fund and regularly deplete it to pay for things that they could/should have anticipated. Then they’re left with nothing when they lose their job or ability to work. 

2. Others feel constant worry when they have to use their emergency fund no matter how large it is. It’s easy to get used to having that money there and being able to mentally count on it. When that happens, it is extremely stressful to think about using any of it, even if it makes sense to do so. (This is what happens to me.)

That’s why I find that it is far better to use the strategies below to plan ahead for life’s surprises and unexpected expenses. 

Budgeting for Unexpected Expenses

Step 1: Make a list of possible unexpected expenses. 

Go back through last year’s bank and credit card statements and look for things that were unexpected, unusual, surprising, etc. If it isn’t something that regularly occurs each month, write it down and include the amount you spent. 

Then think through the upcoming year. What changes do you anticipate that you could plan for? Will your kid be old enough to join sports or start piano lessons? Does it seem like your friend might get engaged? Is your car getting close to needing new tires? 

Remember your list doesn’t need to be perfect. Getting 80% of the way there is better than nothing. 

Step 2: Determine what savings “buckets” you need.

Next you are going to group the things on your list into categories. While it is perfectly fine to group the money you set aside for all surprise/unexpected expenses into one savings account, I find that most people function better by dividing it up. 

You will create a savings account or subaccount for each of your categories. Sometimes these are referred to as “savings buckets” or “sinking funds.”

Your savings buckets can be as general or as specific as you’d like. Here are some examples of buckets that you might have:

• Home repairs

• Car expenses

• Vacations

• Clothes

• A fund for a new home, wedding, party, or other major event

• Kids activities

• Medical expenses

• Pet expenses

• Taxes 

• Insurance

• Holiday and/or birthday gifts and celebrations

*These are all in addition to your emergency fund. 

Step 3: Figure out how much you want to save for each goal each month.

You can think about this in two ways:

1. If you have a specific goal in mind (such as wanting to save $50,000 for the downpayment on a house), divide the total needed by the number of months until you need the money. This will tell you how much you should save each month. 

For example, if you think that you’re going to need a new furnace in about two years and a new furnace will cost $6000, you can divide $6000 by 24 months. That means you need to save $250 each month. 

2. If you don’t have a specific goal in mind or the expenses are ongoing, look at how much you spent in past years in that category. Divide the yearly total by 12 to get a monthly savings amount. 

Add up the total for each category to find out how much should be transferred to the designated savings account each month. 

Step 4: Automate

Set up automatic transfers (ideally right after you get paid). This will ensure that you don’t forget and eliminate the need to think about it. 

Step 5: Monitor

Periodically check in on your savings to make sure that the amount you are transferring still makes sense. Sometimes expenses are higher than expected and you may need to increase the amount saved each month. 

Or you might find that you didn’t use all of the money and you wish to reduce the amount saved per month. 

By using these steps to set aside money for unexpected expenses that you can generally anticipate, you’ll feel much more secure and be prepared for whatever surprised life throws your way.