Unexpected expenses
As the saying goes: the only certainty in life is change. Sudden expenses come into our lives and if we are not prepared for them, i.e. we don’t have savings, this is often the first step towards debt. You never know what might happen. You or your partner may lose your job, have an accident, there will be a need to implement quick medical treatment or many other situations where we suddenly need to organize a smaller or larger amount. Life speeds by, often over bumps, whether we like it or not.
What do we mean by sudden expenses?
First of all, it is important to understand what an unexpected expense is and what it is not. There are bills that you don’t have to pay every month, but they are still not considered unexpected. Examples include:
- Annual property tax
- Annual car insurance premium
- Annual eye examination
- Annual contribution to the Parents’ Council at your child’s school
Such expenses are predictable. You know exactly when they are coming, and you know at least approximately how much they will cost. This makes it easier to plan them in advance in a regular household budget. Simply divide your annual tax bill by 12, your insurance premium by four or your doctor’s bill by twelve and set aside that amount each month to cover your expenses.
Also, regular car and house maintenance expenses are not unexpected. These are costs that you know are bound to come up sooner or later. You may not know exactly how much you will have to spend on a car or house in a given year, but you can determine it quite accurately.
A truly unexpected expense is something you cannot foresee, such as a natural disaster or a medical emergency, a major breakdown. These are things that can happen to you at any time, but you can never be sure if they will – or how much they will cost you. This means you can’t just fit these expenses into your normal budget; preparing for them requires a different kind of planning.
Examples of unforeseen expenses:
- Accident-related expenses
- Emergency medical treatment
- Major breakdowns at home
- Car breakdowns
- Family support
- Unplanned travel
- Unplanned gift expenses
- Pet emergencies
Contingency fund
In order to determine the monthly size of the contingency fund, of course roughly, we analyse our unplanned expenses over the last 5 years. Of course, if we have kept a household budget, this is simpler, if not – we have to remind ourselves of them. We then add up the expenses and divide the resulting amount by 60, the number of months in 5 years (12 x 5 = 60).
- Emotions distort the picture: When we are under the influence of strong emotions, our thinking becomes less rational. We find it easier to succumb to momentary desires, peer pressure or advertisements that appeal to our feelings. Postponing a decision allows emotions to subside and us to see the situation more clearly.
- Avoiding hasty actions: Spontaneous purchases, quick decisions on loans or investments without thinking through all the pros and cons often lead to losses or debt. Cooling off time gives space for analysis, research and comparison of offers.
- Greater control over finances: When we make informed decisions rather than those dictated by emotions, we gain a greater sense of control over our own money. This boosts our confidence and helps us build a more stable financial future.
- Protection against manipulation: Salespeople and advertisements often use emotions (e.g. fear of ‘missing out’, wanting to be ‘better’ or ‘happier’) to encourage us to buy. When we give ourselves time, we become less susceptible to such techniques.
- Building healthy habits: practicing patience and postponing important financial decisions until ‘after we’ve cooled down’ builds healthy habits that will last us a lifetime.
Example:
Total unplanned expenses in the last 5 years – 9 000 PLN
9 000 / 60 = 150 PLN
We should put aside 150 PLN a month for the emergency fund.