We all have emergency and miscellaneous expenses that often get overlooked because they fall outside the normal realm of recurring expenses.
There are holiday, birthday and anniversary gifts to save for. Add vacation expenses, out-of-pocket medical expenses, car repairs and house maintenance to the worry list. Then there are the totally unexpected but ever-present possibilities such as losing the roommate's rental income and that darned washing machine that went on the blitz. Maybe next month the property taxes are due.
Life is full of both anticipated and unanticipated financial demands. We all know it. The question is how do we plan for it?
One good approach is to borrow a tried and true method from bands. It's called a reserve fund and includes creation of a reserve calculation. Sound boring? Well…okay. It may be. But it works. Here are the steps to follow to establish your reserve.
Make a list of the general categories of expenses that might come up. For example:
· Birthday Gifts · Car Repairs · House Repairs · Vacation Lodging · Property Taxes
Do a simple calculation of what dollar amount you might need for the year for each category. Then budget a monthly savings necessary to cover the total.
Use this example:
Based on the past history you know you spend about $900 on Christmas gifts, $75 each on the spouse, the three kids and yourself for birthdays ($75x5=$375) and about $150 a year for various gifts for others. Therefore you need to reserve $1,425 for this years Gifts category. $900+375+$150=$1,425. Repeat this process for each of your categories; add the numbers up and you will have determined an annual dollar amount needed to cover all categories of emergency and miscellaneous needs.
The next step is to figure out how to reserve the funds. You may want to have a monthly amount allocated for savings. Perhaps in your situation it would be better to put aside the whole amount each year when you receive your income tax return. Whatever works for your is the plan to go with.
For most, putting money each month into the miscellaneous and savings funds will be the most manageable approach. To do so, add up all of your annual reserve needs. For example: $900 Gifts; $300 Auto Repair: $400 Medical, $800 Vacation and $600 Home Repair = $3,000. The total Reserve need is $3,000 for the year. Divide that $3,000 by 12 months and budget for $250 a month to cover these expenses. Don't spend it. Let it build up in your miscellaneous, savings, or other appropriate category.
If the annual income tax return approach is best for you, when you receive your tax return deposit $3,000 into the appropriate bank account and do not touch it except to address the targeted expenses. Ever better, put it in an interest-bearing account and let it make money for you until you need to use it.
If you get a quarterly commission or bonus you may want to divide your reserve needs by four (4) and address it that way. You get the picture. Do what works for you.
This plan of action will become your own Reserve Account.
At the beginning of each new year you should have enough data gathered to understand how much was reserved last year, how much was spent, and how accurate your reserve calculations were. Adjust accordingly and repeat the process for the new year.
Remember, you are the CFO (Chief Financial Officer) of your own life. Take charge. A little planning can lead to an abundance of financial success.