Some Nasty Financial Surprises Shouldn’t Be “Surprises” at All

Up until a few years ago, I felt that anything negatively affecting our accounts (besides groceries, gas, and the usual) was a big ‘ol nasty surprise.

Like…

…a year and a half ago when the tile started coming up off the floor of our master shower, revealing that there was no shower pan and someone had tiled right onto the foundation (we’re finally getting around to this job)

…or the day when I was hit with freezing cold water because the water heater had unexpectedly stopped working 3 months into Paul’s unemployment

…and this past weekend when one of our car batteries died while we were picking up some coffee

However, a conversation I had with a coworker several years ago showed me that I was completely wrong.

car broke down edited

Is it really a Surprise that a 10-year Old Beater Car Died?

Several years ago I was fuming at my coworker friends because my beater car had died. It turned out to be the transmission or the head gasket, or some other hugely important (and highly expensive) piece of equipment to repair. But the cost of the repair did not make sense with what we had paid for the car.

Nasty financial surprise: getting to pay for a new beater car!

Then one of my friends turned to me and said something like, “Come on, Amanda. You knew that car wouldn’t last forever.” He then went on to explain to me how you’re supposed to open a car savings fund as soon as you purchase a new car and make a payment to yourself each month so that by the time your car dies, you have enough to pay cash for a new one.

Lightbulb.

Well, not at first. First I had a few more “poor-me” thoughts (who doesn’t?).

But then it turned into this great epiphany that changed the way we do finances in our household forever.

Planning for Predictable, Nasty Financial “Surprises”

If I want to keep my head in the sand, then I would continue to welcome these “surprises” into our lives. But if, instead, I decided to do a little planning for the normal lifecycle of things, then I could prepare us with some proper funds in the bank.

Control? I love control!

Liz Weston talks about this in her book, The 10 Commandments of Money: Survive and Thrive in the New Economy.

She explains that the three biggest expenses that “surprise” people the most, according to a Pew Research Center Poll, are:

  • Medical (34%)
  • Cars (24%)
  • Housing (20%)

The thing is: you should not be surprised when there are costs associated to these three categories. They’re more like corrections and upkeep, not surprises.

Sure, it might be surprising when and where it happens, but it should not be surprising that you will have to do things like make home repairs, go to the doctor and take care of conditions that occur naturally, and repair/replace vehicles.

How to Know What to Save for the Big Three

So, how should you estimate what to save in order to put yourself in the best possible position moving forward (without feeling like you’re pulling a number out of thin air)?

  • Medical: Take a look at your current health insurance policy. What are your deductibles for smaller medical expenses, such as doctor visits and prescriptions, and what is your maximum out-of-pocket you will be responsible for if you or anyone in your family ends up in the hospital? You’ll want to set aside money in accordance with these figures.
  • Cars: For cars that are up to 5 years old, check out Edmunds.com True Cost to Own Calculator. If your car is older (beaters are the way to go!), then Liz Weston suggests adding up your repair receipts from recent years, add in 10% for good measure, and figure out a yearly average to save.
  • Housing: The advice given here is that you will generally spend between 1-3% of the cost of your home each year in repairs and maintenance. So take the amount you paid for your home, and multiply it by 0.01 and 0.03. Aim to save a number in between these two each year for house repairs. (Hint: if your home is older, save closer to the 3%, and if it is newer, save closer to the 1%).

I hate nasty financial surprises whacking me over the head as much as the next person. And you generally can’t predict the exact date of when something is going to occur. But with a little smarts and planning, you can get pretty close, which will allow you to prepare yourself.

After all, an ounce of prevention is worth a pound of cure!

P.S. pink editedCurious as to HOW you’re supposed to save all of this money, plus for that trip to Aruba you’ve been wanting to take? Subscribe below and I’ll update you when my new course, Save Beyond Your Means: Transform an Average Paycheck into a VIP Life releases (September).

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10 comments… add one

  • Anticipating irregular expenses has been the big key that has kept us from having any event we consider an emergency. Mostly it’s been car repairs that have come up, and we have a fund for those.

    What you’ve written represents another way of calculating an emergency fun, aside from X months of spending. Do you think people should have an EF for unemployment and a bunch of savings buckets for these other common surprise expenses? Or just one or the other? We have an underfunded EF and a bunch of savings buckets for short-term expenses that add up to a decent amount of money, but I’m never confident in the allocation.

    • Hi Emily! Great question.

      While it’s up to personal choice, I think it is way easier to make sure each of your different areas are funded by separating them out into sub-accounts (online banks allow lots of these). That way you can instantly grasp where you are financially, and where you need to funnel more money.

      For us, our emergency fund is not our car repair fund (like you guys), or our house repair fund; in my mind, we should count on having to repair our 7+ year old cars and almost-40 year old house. It’s more like planned spending than the types of things you should fall back on an emergency fund for.

      And of course, if you’ve been following along, you know that my husband and I have this uncanny knack for getting laid off (two times EACH in the last 8 years). So that has certainly colored our decision on this:). I’d hate to need part of our emergency fund for basic bills and living expenses, only to find that we used a chunk for a car repair or to repair our master shower (our current large project).

      However, having an emergency fund and not having these other planned expense funds is WAY better than no saved money at all. So keep truckin’!

  • I have a very difficult time with this. Anytime that I had to take money out out of my savings was a headache and a nasty surprise. Even if I knew I was going to have to take money out for books for college, rent, etc. it was just something that I was not looking forward to and did not plan ahead for.

    • Amanda

      I had to learn this as well…especially since I love savings so much.

  • Amy

    We have our EF, of course–but then we also have a “buffer” account for when expenses come up that are above and beyond the regular monthly expenses. All of our savings, as well as anything left over at the end of the month goes into that account. We also take money out of there to fund our IRA’s. I used to have sub-categories and keep track of them, but I always ended up having to pool the money anyway because something would come up in a particular category and there wasn’t enough in that category so I would pull from another one.

    • Amanda

      Hi Amy! Thanks so much for sharing your strategy with us. And bravo, you on having both an emergency fund as well as buffer accounts.

  • In a rental property, you have to keep up with maintenance, as things fail when you least want them too. As you are headed out of town, a hot water heater leaks. Or a Dishwasher fails.

    Fix things on your schedule, do not wait for them to break.

  • Can I get an AMEN?? Yes, it’s a huge lightbulb moment that everyone HAS to have! Was it really a surprise my friend’s birthday happened, at the same time every year and I had to buy a gift? Was it a surprise when I had to get a gift and book a hotel for a friend’s wedding I’d put on the calendar 5 months before? Planning is something I had to get used to…. I was so bad for awhile that even things that weren’t car or house related, and were just like, “CHRISTMAS, WHERE DID YOU COME FROM??!” put me in a panic…yet it shouldn’t have!
    hahah, love this post!

    • Amanda

      Amen! I’m so glad you loved my post:). Way to change your planning habit.

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    as I found this piece of writing at this website.
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