BUILDING CONTINGENCIES INTO YOUR BUDGET

BUDGETING IS NOT AN EXACT SCIENCE

Anyone who has created a budget at any point in time knows that something always happens that was not expected. It could be that something cost either more or less than expected. Or it could be that something came up that was not expected at all. The longer you have been budgeting the more accurate your budget will get. You will begin to anticipate things that you did not anticipate before. Things that you might have missed get added to future budgets so that they become more and more accurate. However, it seems like no matter how many years we have spent budgeting, there is always something that comes up that we did not anticipate.

BUDGETING FOR EVERY DOLLAR

If we get too exact with what we expect to spend we leave ourselves no wiggle room. When something comes in above what we thought we will be over budget. If we are too generous with contingencies, we may find that we don’t have enough income to cover it all. Also if you build in too much contingency you may tend to overspend when you really could be saving more. For example, if you budget for $200 a week for groceries, but really only need to spend $150 you may tend to buy extra things just because you know you have the extra money in that category.

In certain areas, you may want to allow yourself that extra freedom. But if you do it in each spending category you may end up spending more than you really want to. There are different ways that you can prepare your budget to allow for contingencies within your budget.

BUDGETING YOUR INCOME

One place you can build some contingency coverage into your budget is with your income. By lessening the amount that you budget for the income you will have a little extra cushion. With a variable income, you can budget your income based on the lower end of your pay. If you end up making more you will have some extra dollars to help cover any unexpected expenses. If you are on a salary, you can exclude your annual raise from your income. For example, I get an increase each year in January.

When I do my budget for the upcoming year, I budget the amount of income that I made last year, not including the raise I will be getting. I partially do this because often increases in health insurance premiums can end up taking away a portion of the pay increase. But, it’s also nice to have that little extra bit of income when I record what I actually earned every two weeks.

BUDGETING FOR SAVINGS

It is so important to make sure that your budget includes funding savings also. Budgeting all of the money you earn to cover expenses can make it difficult to fund savings accounts. Without savings, we are left with nowhere to go when something comes up that we cannot afford.  That’s when we often end up turning to credit cards. Your savings and emergency funds accounts might be at the level you want them to be. But, if you have no money budgeted for savings you will have no way to replenish those accounts if needed. At some point, you will likely need to dip into those accounts. So, including money in your budget to go to those accounts can help give you a little extra cushion.

BUDGETING FOR MISCELLANEOUS DOLLARS

Every budget should include a line item for miscellaneous expenses. How much you can put to that line will depend on how tight your budget is. Again, you probably don’t want to budget the miscellaneous dollars too high. You may be tempted to spend on things that you really would rather not be spending on if you have too much cushion built into your budget. But, no matter how detailed of a budget we have, something always seems to come up that we did not expect. Often things that we did expect end up costing more than we thought. A perfect example of this right now is the cost of gas. By having some miscellaneous dollars included in your budget you have somewhere to pull from if you have to spend more than you had expected on another budget line.

BE PREPARED TO MAKE BUDGET CUTS

Part of having continencies in your budget is identifying expenses that can be cut if needed. We had a rough year this year when it comes to our budget. There were large medical bills, and some unanticipated home and car repairs. Some money had to be pulled from our emergency fund.

I was able to somewhat limit what had to come from our emergency fund by making some cuts to our budget. For example, our budget included dollars for car detailing and for a preventative maintenance item on one of our vehicles. The maintenance was the type that you do at a certain mileage, not a pressing issue. Given that we had hardly driven the car, we were able to decide to hold off on that for a little while. Since we had so many other things come up, I knew that I could definitely skip the car detailing this year. And we were able to hold off a little longer on the preventative car maintenance. It’s just the point of really knowing your budget so that if something unexpected happens you know some things that you can go to first to try to offset some of the cost.

EMERGENCY FUND AS A LAST RESORT

Depending on where you are at in your current financial situation, you may or may not have an emergency fund to pull from. The problem with having an emergency fund is that once we pull money from it we need to work hard to get that money back in. So, we really want to use it as a last resort. If we use the money in our emergency fund each time an unexpected situation comes up our emergency fund will quickly begin to decline. And if we do not work hard to replenish the money that was taken out we will end up not having an emergency fund over time. So, really even when a true emergency situation comes ups that causes us to use our emergency fund we will still need to find those contingency dollars to use to get the fund back up to our desired funding amount. 

DON’T GET COMPLACENT

Sometimes we have a period of time where we easily stay on budget. However, that does not usually go on forever. It can be easy to start lessening the contingencies in your budget and start spending those dollars more freely. That’s ok to a certain extent, but you don’t want to get too comfortable with not needing that little cushion available. Most likely at some point, something will occur where you will need some extra money. So, even if you are having a string of really great years where everything is going to plan.  Still build in those contingency dollars. At some point, you will likely need them.