Failure to plan for unforeseen costs can hurt household budget, lead to financial crises
Many of us have a pretty good handle on living expenses -- rent, car payment, mortgage, utilities, gas, food and the like -- but some expenses can catch us by surprise and derail the household budget big-time.
Many of us have a pretty good handle on living expenses - rent, car payment, mortgage, utilities, gas, food and the like - but some expenses can catch us by surprise and derail the household budget big-time.
A survey released this fall by American Express found that nearly half (47 percent) of all Americans experienced unforeseen expenses in the past year - many of which they easily could have planned for.
More than four in 10 Americans got hit with car-related and health-care expenses they didn't see coming, and roughly one in three with house-related expenses such as repairs. Still others found themselves facing unforeseen education and insurance bills.
"I call these 'unruly expenses' -- they seem to come out of nowhere," said Abby Morton, a certified financial planner with SagePath Financial Planning , based in Bangor, Maine. "If they're not recurring monthly, they're not on people's radar."
Joshua Huffman, program manager for the Financial Resource Center, a division of The Village Family Service Center in Fargo, agreed.
"These are the things we run into a lot," he said. "We see people who are in financial crisis or have racked up credit card debt ... People often turn to credit cards (to cover unexpected expenses), especially for car and home maintenance.
"They feel no pressure or need to plan for it."
Usually, their financial dilemma is the result of poor planning or denial, he said.
"People think, 'Oh, that's something for six months from now.' They don't really think about it."
Or they think they won't have car trouble, he said, "but those things always come up.
"If you don't plan, it's going to cause problems."
In order to be better prepared for the unexpected expense, "think of it as part of your annual budget," Huffman said.
He likens it to preparing for Christmas gift-buying expenses by putting away something every month to cover the cost.
"It doesn't matter what amount it is - could be $8 a month - plan for it," he said. "It's when you don't plan that you feel that hurt."
He advises clients to build these unforeseen expenses into their monthly budgets, the same as they would for regular known, periodic expenses.
It's a good idea to keep these funds in a separate bank savings account - so they are not intermingled with your checking account - to "make it easier to not dip into it," he said.
But even then, "it still requires some discipline."
"Set it up almost like a monthly bill," he said. "It's a different mindset. It's not a matter of, 'at the end of the month if there's anything left I'll throw it in savings,' because there won't be any."
Experts suggest that, in general, Americans should have three to nine months of living expenses in savings that they can spend on unforeseen expenses.
If you are older or have dependents, you may want to be even more conservative and save 12 months of expenses, said Anthony Criscuolo, a certified financial planner with Palisades Hudson Financial Group in Fort Lauderdale, Fla.
But, in reality, most Americans aren't even close to having this amount of savings - and they're saving less than in the past. Research from the Employee Benefit Research Institute released in 2014 found than 36 percent of American workers have less than $1,000 in total savings and investments (up significantly from 28 percent last year) excluding their home and pension, and six in 10 have less than $25,000.
Experts say you should put away a little money each month (the amount will depend on your budget) until you have six to 12 months of income saved. Put it in a savings account outside of your personal bank, so you won't be tempted to use the money for daily expenses, said Lesley Kilcullin, a certified financial planner at Fiduciary Advisors in St. Louis.
You should also save beyond this so-called emergency fund "for the large, one-time, unexpected things, like car repairs, home fixes or health care bills," Criscuolo said.
"As a starting point, if you have insurance, you should at least save the amounts of your deductibles," he said.
While drivers expect to shell out money for gas and oil changes, repair costs often surprise them, experts said.
The average repair cost for a car made between 1996 and 2012 was $367.84, according to the 2013 Car MD Vehicle Health Index, though, of course, some repairs cost significantly more.
It's smart to set aside $250 to $2,500 a year for expenses related to unexpected car issues, according to Wan McCormick, founder of Reliable Alliance Financial in Fairfax, Va.
If your car is older or prone to problems, you may want to save even more.
Huffman encourages his clients to set aside one percent of the value of their home every year to cover the inevitable home maintenance and repair costs.
"If it's a $100,000 house, that's about $80 per month," he said. "Or the water heater goes out or the shingles need repair or replacement."
"I tell clients, 'These are actual expenses you're going to have.'"
Homeowners should have at least enough money saved so they can replace a major appliance, as well as at least one other likely major repair, experts say.
"A good home inspection report will give you ideas on when the major house components might expire," McCormick said.
To keep their premiums down, some people opt for high deductibles in their insurance coverage for their homes, as well as for car and health insurance.
"So many are on high-deductible plans," Huffman said. "We see it more and more."
Deductibles that used to be "super low" are now in the range of $1,000 to $2,000.
"For more serious things, you have to be prepared for that deductible," he said.
Owners of new or newer homes also need to put money aside for unforeseen expenses, Huffman said. "It's shocking. There's always something to take care of."
While the homeowner may have a one-year warranty on new construction, "there will be projects you're going to want to work on, he said. "Even if it's a half-percent (of your home's value), set something aside."
Huffman encourages his clients to be "savvy consumers" by shopping around for the best value in insurance, particularly for home and automobile.
"Check on how these companies perform (through) the Better Business Bureau," he said. "But be sure you're comparing apples to apples. One company may be way cheaper but may not provide the same level of coverage."
Even those who have health insurance are often surprised by how much they must pay out of pocket beyond their co-pays, experts say.
While it's impossible to predict future health care costs, it is important to have enough money in savings to cover your deductible, they say, and having more than that (possibly thousands more) is a good idea because there are some things that insurance doesn't cover.
When it comes to health savings accounts or flexible spending accounts, Huffman does recommend participating in those plans.
"For the most part, you should be taking advantage of that; those are pre-tax dollars," he said.
"If there's a health issue you're frequently going in for or you have a regular medical expense, (the flexible or spending plans are) where you're going to get more bang for your buck."
While tuition is usually the costliest aspect of your child's education, it's often other things - computers, supplies, fees and extracurricular expenses - that surprise parents each year.
In 2014, the average family with a child in kindergarten through high school was estimated to have spent $670 on average on back-to-school supplies. Costs for participation in sports and extracurricular activities will go higher as your child gets older.
If you have a child in college, unforeseen expenses could be even higher, experts say. While you likely know what tuition and room and board will be, you may also get hit with expenses like on-campus parking, sorority or fraternity fees and other extracurricular expenses.
These kinds of unexpected costs - along with travel to and from home for holidays - could add up to thousands of dollars each year.
"Sit down and take stock of what (school-related costs are) running you," Huffman recommends. "It's not hard to look back and figure what you spent."
By looking over past bank statements and pulling out specific expenses, "you can get a realistic amount" to use in planning for school-related costs in your annual budget.