A common struggle we all experience when it comes to managing our money: Unexpected expenses.
You’re cruising along just fine with your regular expenses and then BAM! Your car needs new tires. Your kid breaks his leg. The water heater stops working.
Now a giant chunk of your paycheck has been involuntarily diverted to paying for something that was supposed to be paying your water bill, your credit card payment, or vacation savings.
No wonder you feel like you can’t get traction with your money. You’re the hamster in a wheel — working really hard to run fast, but your efforts never bring you to an actual destination.
What if there was a solution? It doesn’t require you to earn more money or to try a new investment scheme. What is does require is making a plan for how your money is going to be spent and then living according to that written plan.
I and tons of people have been living on a written monthly cash flow plan for years and we RARELY have an unexpected expense. And when those expenses occur, as rare as they are, we have the cash on hand to pay for them without derailing the rest of our budget.
Here’s how a monthly cash flow plan eliminates unexpected expenses:
1. YOUR SINKING SAVINGS ACCOUNT
Most people don’t have a concrete plan for how they are going to pay for a bill coming in 6 months. You know you’re going to have to pay it but you just hope that you’ll have cash in your account in time. And then the due date rolls around and you freak out that you don’t have the cash (because who do you know that just has a bunch of cash floating around?).
Now we have an emergency situation and you’re forced to pull out your credit card or write a check from your home equity line of credit or cash out part of your 401K.
The written monthly cash flow plan forces you to incrementally save for future purchases and expenses, both the ones you know are coming and the ones you are fairly certain you’re going to incur at some point.
Let’s say I have my $400 annual life insurance premium due in six months. I count the number of months from now until the bill is due (6) and divide $400 by 6 ($67). I save $67 a month for the next six months so that when the bill is due, I have $400 saved to pay my premium.
You do this with all the bills and purchases you know are coming in the upcoming year and you put all of this money in a special account called the “sinking savings account.” This is where the money you’ve already spent on paper lives until you’re ready for it to do it’s job. Our family keeps track of what our sinking savings account money is doing on a Google Docs spreadsheet, but a notepad would work just as well.
In addition to the bills we know are coming (expected expenses), like insurance premiums, car registration, property taxes, school uniform purchases, and Christmas gifts, we also plan for anticipated expenses. These are things like car repairs and replacement, home maintenance, school activities.
We don’t know what’s going to break on our cars, but we know that something is going to break, so we plan for it. We don’t know if our furnace is going to bite the dust or it’s going to be the oven, but appliances stop working so we are going to save money in our sinking savings account under “home maintenance” so we’re ready for it. And we all know that schools nickel and dime us to death, even public schools, so we put money in our “school and sports” category every month so we can pay for field trips, after-school class fees, and science fair supplies.
Saving every month for both expected and anticipated bills and purchases will eliminate most “unforeseen” expenses, but there are times when you just honestly didn’t see an expense coming.
2. YOUR EMERGENCY FUND
Your emergency fund will pay for all those things that come up that you don’t have the money to pay — it’s your financial safety net.
Did you receive a medical bill that you didn’t know was coming? Is your ex late paying child support this month? Did your washing machine die before you were able to save enough to buy one with your sinking savings account? Use your emergency fund. And then next month, you stop funding any other savings category until your emergency fund is fully replenished.
Ideally, you will have 4-6 months of expenses saved in your emergency fund after you’re debt-free (except your primary residence mortgage). If you’re in debt and working hard to pay your debt off, you need $1000 in your emergency fund NOW. And your emergency fund is completely separate from your sinking savings account (you will have two savings accounts).
Here’s the magic part — after you’ve fully lived on a written monthly cash flow plan for 6-12 months, depending on how much debt you have to pay off, you should have a healthy sinking savings account which means you rarely have to use your actual emergency fund.
Why? Because you’re getting really, really good at anticipating expenses. When something funky comes along, you probably have money saved for it. The number of situations that actually qualify as a true emergency drastically decrease.
And don’t even start with me on, “We don’t make enough money to save like this.” Yes, you absolutely do.
You don’t need to make more money in order to manage it well, you need a plan to manage it well.
If you’re living paycheck-to-paycheck or don’t have money to save, let me gently suggest that you’re the exact person who needs this because one unexpected expense is going to throw your household into financial chaos. Every single dollar that you earn needs to be spent intentionally so you have enough to pay your rent, keep the lights on, and put food on the table.
How will you ever have the money to save? You change the way you’re spending.
If you don’t have a plan, I guarantee you’re spending too much money. You’re an undisciplined spender. With a plan? You are in total control of where your money goes. Not one dollar is spent without your permission. And when you do this month in and month out, you will have extra money that can be used for savings. I promise.
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