Photo from Sandy Millar on Unsplash
Budgeting gets a lot of attention, but one thing we don’t talk about as often is the logistics of how to plan for unexpected expenses and short term goals. Maybe you want to save for a down payment on a house, home renovations, or vacations. Or it could be something more specific (and less fun) like new tires for your car or a new dishwasher. Planning for these expenses can be a challenge because you may not know when they’ll occur or how much you’ll need. Luckily, it is easy to set up a system that will have you saving money for whatever expenses are in your future.
Step 1: Determine what savings “buckets” you need.
Let’s say that you own a home and know that you’re going to have to pay your home insurance twice per year and your property taxes once per year. On top of that, you know that part of owning a home is having things break, so you want to have some money on hand to pay for those random expenses.
What you can do is create a “Home” savings account or virtual bucket in your favorite budgeting app and set up automatic transfers to that account.
Start by making a list of all of the non-monthly expenses you encounter over the course of the year. This might include things like home or car maintenance, insurance, taxes, education, holiday gifts, medical bills, etc.
You’ll also want to include more fun goals like vacations, other fun activities, or home improvements (hello new kitchen!!!).
Each of these can be it’s own bucket or you can group things together under broader categories.
Note: a rainy day fund for things like home or car repairs is different from an emergency fund. You need both. An emergency fund is for a catastrophe like job loss so that you have enough money for survival. A rainy day fund is for unknown expenses that you can reasonably expect to occur. Home and car owners know that eventually something will break.
Step 2: Figure out how much you want to save for each goal each month.
To figure out how much to save, estimate how much you’ll need and when you’ll need it. Divide that by the number of months until the money is required. For example, if you know that you’re going to need a new furnace in about two years and a new furnace will cost $6000, you can divide $6000 by 24 months. That means you need to save $250 each month.
If you don’t know what or when the expenses will occur, you could look at how much you’ve spent in previous years and calculate the average. Do your best to create some sort of estimate. It’s better to save something than nothing at all.
Make sure to work whatever monthly amount you decide into your budget.
Step 3: Create a system for managing your savings
Although many people enjoy using budgeting apps, most people find it mentally easier to actually create different accounts or sub-accounts for each savings goal. Read more about the benefits of each system in this post.
Step 4: Automate
Whether you’re using an app or multiple savings accounts, the key is to make it happen automatically. With either of these options, it is easy to set up an automatic monthly transfer from your checking (or wherever your income is deposited) to your savings goals or accounts.
Step 5: Monitor
Periodically check in on your savings to make sure an account hasn’t become too large, and the amount being saved still meets your needs. Sometimes we have a year of extra-large home expenses, and we need to set aside more. Or maybe it is time to finally plan that vacation. Or perhaps you didn’t have very many home expenses, and moving some of the money to an interest-bearing account makes more sense. Put an appointment in your calendar once or twice a year (or more) to check in on your savings goals and make any necessary adjustments.
Just get started!
Setting up a system for managing your short-term savings goals and planning for unexpected expenses is well worth the effort. It can be the difference between continually worrying and feeling secure. You’ll sleep better at night knowing that you have the money to pay for any expenses that arise. You might even be surprised by how much you can save up for vacations. Wouldn’t it be nice to take a vacation knowing it is paid for in advance? It may take time to get your system going, but once you do it, you’ll have so much more peace of mind.
