One cannot predict every expense they will incur in a given month or year. Things like home repairs, car repairs, and rental increases can pop up anytime without previous indication, requiring individuals to shell out money suddenly. This can affect their budget and cause a lot of financial instability. Since such expenses are unavoidable, individuals must create a solid plan and use the right tips for managing irregular financial burdens.
Plan a monthly budget
A monthly budget is necessary to become financially stable and prepare for unexpected expenses. To create a budget, one must first estimate their income from different sources during the month, such as salary and interest and dividends on investments. One must then try to allocate this amount for the estimated expenses, like rent, utilities, groceries, and discretionary spending like entertainment and dining out. A budget will give one a fair idea of how much money will remain as emergency savings for unpredictable costs.
Create an emergency fund
As the name suggests, emergency funds help tackle emergencies. The emergency could be anything, such as sudden termination of employment or unexpected major home repairs. The fund acts as a comfort cushion or safety net during such times. When creating a fund for irregular expenses, the general rule of thumb is to put aside three to six months’ worth of salary. A key requirement to achieve this goal is consistency. Even if the amount set aside every month is small, one should be consistent in their savings. Over time, the corpus will grow, and one will have sufficient money to tackle an unexpected financial challenge.
Set aside a sinking fund
A sinking fund is money set aside for anticipated but irregular expenses, such as holiday shopping or car maintenance. Unlike an emergency fund, which covers unforeseen expenses, a sinking fund allows for planned financial flexibility. Creating separate sinking funds for various categories prevents the need to dip into savings or take on debt. Consistently contributing even small amounts to these funds can reduce financial stress with time.
Negotiate payment plans
House repairs and car repairs are common expenses that can arise suddenly. One way to save on these unexpected expenses and avoid financial trouble is to negotiate the payment terms. For instance, one can ask the contractor (for house repairs) or the mechanic (for car repairs) if they have an installment plan. This way, the cost will be broken down into manageable parts, making it easier to handle the situation. Some service providers may also have interest-free payment plans. Negotiating with the provider is one of the most useful strategies to manage unexpected costs.
Use insurance
Insurance is a handy tool for planning for irregular expenses. One can explore different types of policies, such as renter’s insurance, home insurance, and car insurance. Insurance helps cover a substantial portion of the overall cost, ensuring one’s finances are secure. That said, one should research well when buying a plan and have a clear understanding of the things covered. It’s also necessary to review the policy from time to time and make necessary changes if needed.
Cut non-essential expenses
An excellent way to save money for irregular expenses is to cut back on unnecessary spending, such as entertainment, subscriptions, and dining out. These costs often go unnoticed and add up quickly, leading to financial strain. Those who need help identifying and cutting out non-essential expenses can use budgeting apps. These apps give people an insight into places they are overspending and provide tools for budgeting for irregular expenses.
Avoid using credit cards
Credit cards and personal loans make it convenient to cover unexpected expenses. However, they have their own set of complications. Personal loans, for instance, have a high interest rate, meaning the amount to be repaid will be higher than what was borrowed. The higher repayment amount can make it all the more difficult to pay off the balance in time. So, before using credit options, individuals must assess how they will repay the amount and whether they have a long-term financial plan.
Borrow from friends or family
Individuals faced with unexpected expenses can contact their family or friends for help instead of borrowing from the bank. This tip is useful for people looking for alternative methods to meet the cost. Borrowing from trusted friends or family members offers lower interest and more flexible terms. However, one must handle these situations with clear communication and transparency. When borrowing from loved ones, one should ensure both parties are on the same page. This will help build a professional relationship with the lender and avoid misunderstandings.
Assess the situation calmly
When faced with an unexpected expense, it’s important to pause and evaluate the situation with a clear mind. Acting on impulse may lead to poor financial decisions. Instead of rushing to meet the expense, one should determine whether it is urgent or can be delayed. For example, a car repair or maintenance may need immediate attention as it aids in daily work commute. At the same time, a home renovation plan might be postponed until finances improve. Being calm and composed helps plan for irregular expenses effectively.
