I haven’t written much about our finances lately, mostly because they are now incredibly boring. We haven’t had any recent milestones or breakthroughs. We haven’t figured out a way to drastically slash our tax bill any further or pay off our mortgage sooner than expected.
But between a conversation a couple weeks ago on twitter about whether to purchase pet insurance, and a recent post on Get Rich Slowly about “Budgeting for Mistakes” I realized there is something we’ve done that’s saved our hide a number of times that I didn’t write much about.
Savings accounts for “things that will certainly go wrong someday, we just can’t know when.”
So first off, I obviously take issue with the fact that the writer calls these unexpected expenses “Mistakes.” I find it hard to consider an emergency vet trip, house repair or car repair a mistake. Mistakes are avoidable. The only avoidable problem in this scenario is not budgeting for the fact that all of the above will probably happen at some point.
We’ve been socking away small amounts of money into accounts specifically for those things for the past number of months, and it’s saved us from upsetting our day-to-day budget quite a few times. We’ve sailed through a $450 vet bill, a $380 car repair and replacing a $150 sink, all quite recently, all practically without blinking.
Making sure there’s money in those accounts definitely cuts into our regular disposable income, but I happen to much prefer having the money available when these things do come up, rather than finding a way to scrape those costs out of our monthly budget while already dealing with the stress of a sick dog or broken car.
Sierra writes in her post that she’s going to try padding her budget by an extra 5% each month, and if no “mistakes” come up, then shuffling that money on to her debt repayment. I think it’s a good start, but in my experience will probably leave her in a feast or famine situation with these mistakes, instead of actually solving her problem.
The way we’ve ended up structuring our accounts has been to make an educated guess on what kind of unforeseen expenses come up in a year in all those areas and try to build up enough in those accounts that we can cover the bill when it inevitably comes. It’s actually pretty easy when it comes to cars or houses.
The pet thing was a bit trickier (which is what got me thinking about this in the pet insurance discussion). I think everyone agreed that it’s a very good idea to have some sort of financial backup to support a pet’s illness or injury – the debate was whether to build up a savings account of your own, or to pay an insurance premium. For us personally, we chose to go the savings account route, and trust that should our dog end up as one of the few who gets an illness where treatment costs drastically more than we can afford to pay (cancer, etc.), we would just keep her comfortable until that was impossible, and put her down. We have a point at which she is, after all, “just a dog.” That view is not held by everyone. I suppose if you are the type to purchase kitty cardiology or puppy chemo you might want to go the insurance route (though I’d be wary about knowing exactly WHAT the insurance would cover).
But the big key with any of these expenses (and where I think Sierra might fall down) is that while they can be annualized and averaged over a period of time, the ACTUAL expense very rarely shows up in such a neat way. Our car ran like a dream for over a year. This year we’ve had a sensor to replace, the brakes are near the end of their life and we really need a professional windshield replacement at home, since the car would need one to get to the mechanic in the first place. Same thing with our condo: great, until very recently when we had to replace a bathroom sink, and the kitchen faucet’s on the fritz. We spent about $1500 in emergency/extra treatments for the dog this year, the first such expenses she’s had in her life.
Since Sierra’s got debt she’s still trying to pay off, I do agree that it should take precedent over building up a bunch of different emergency accounts while she’s got an immediate need for the cash, but by depending on a small monthly surplus, rather than a small security account that’s slowly but surely growing, she might not notice it helps all that much.
Update: If you want a comprehensive read about how someone else is doing this (she’s got her savings system set up almost identically to ours) check out heather’s post.
Now that we’ve paid off our debts, we’re finding ourselves with little dribs and drabs of extra funds. For the first couple of months we’ve let it sit in the main account where inevitably it gets spent (usually by me), but we’re going to begin socking it away into a TFSA a little bit at a time. Our family income is somewhat variable so it’s hard for me to think about having money “out of reach” but it’s a very good idea! It’s just going to take a bit of a shift in thinking. Reading this post has been good inspiration – thank you!
Sue´s last blog post ..My Pacific Buffet strategy
I’ve also heard from some people that it’s hard knowing there is money “available” but that shouldn’t be spent. I definitely tend to lean that way myself (if some extra money doesn’t have a purpose, I will quickly and easily think one up for it!). Having the extras funneled into very specific emergency funds at least helps trick my brain into thinking it’s already spoken for.
As for the variable income, I don’t really have experience with it, because the idea gives me heart palpitations, but the one constant I’ve heard is to make your day-to-day budget based on your minimum monthly earnings, and use the extras to pay for emergency funds, extra debt repayment, etc.
We have a “rainy day” account with the intention of having at least 3 months worth of expenses saved. It came in very handy when we the van needed a new transmission and it’s nice to know we have that extra padding “just in case”. I think we contribute about $50 a month when we’re at or near our target, a bit more when we’ve just had a big expense. Works for us!