Updated on 08.16.11

Emergencies and Irregular Expenses

Trent Hamm

Every once in a while, I’ll get an email from a reader that goes something like this…

This month, my annual insurance bill came due and I couldn’t make ends meet. I cleaned out my emergency fund. Then, at the end of the month, my car broke down. What’s the point of having an emergency fund? I’m in debt anyway.

The issue is this: an irregular bill that you know about ahead of time, such as your annual insurance bill, is not an emergency and shouldn’t tap out your emergency fund.

Emergencies are things that you did not know were coming, such as your car breaking down, a parent or a child or you getting sick, a tree falling on your house, and so on. An emergency fund is money you set aside for things you didn’t know were coming.

Irregular bills are expenses that you know are coming but may be a long way off, like an annual insurance bill or a tax bill. These aren’t emergencies, so you shouldn’t use your emergency fund for them.

Why shouldn’t you use your emergency fund for these things? The big reason is that when you drain your emergency fund for non-emergencies, you leave yourself exposed to actual emergencies. Anyone who has ever experienced Murphy’s Law knows exactly what I mean here. You tend to find yourself needing something just as soon as it’s not there.

How exactly do you handle irregular expenses, then? I use a handful of techniques.

First, I try to pay for irregular expenses out of my regular budget. My monthly budget is pretty flexible, with the excess mostly just being dumped into our savings for our dream home. If I can, I just pay for irregular expenses out of my checking account so I don’t have to worry about it.

Second, I actually save for such expenses. I have an Excel spreadsheet where I keep track of all of the irregular bills I cover and how often they occur. I total up how much these will cost me over the next year, divide it by twelve, and find myself with an amount that estimates how much I’ll need per month to pay for all of these irregular bills. On top of that amount, I usually add about 25% to help with bills that come up sooner rather than later.

I then set up an automatic savings plan with my bank to move this amount into my savings account automatically each month. I have a savings account specifically for such purposes. Then, when I need to pay an irregular bill, I just take money out of that account to pay for the bill without any real worries.

Yes, over time, that account builds up some excess money. That’s fine. It helps me in the event that there are irregular bills that I’ve forgotten about.

So, let’s say I have an annual insurance bill that’s $1,200 a year, a semi-annual insurance bill that’s $450 every six months, and another bill that’s $200 every three months. That’s $1,200 plus $900 plus $800 per year, a total of $2,900. I divide that by twelve, giving me a monthly amount of $241.67. I add on an extra 25%, which gives me a total of $302.08 per month.

So, I just set up an automatic transfer of $300 per month into a savings account. When those big bills come in, I’ve got enough in that account to cover them.

I recalculate this every time a new bill pops up or a bill ceases to exist, so that I know how much I need to pay in the current situation. I then, of course, adjust my automatic transfer as well.

If I find myself in a situation where this plan doesn’t work, then I’ve got a real problem on my hands. Yes, I’ll pay the bill, but not being able to handle such a known bill means I need to spend some time re-evaluating my financial planning. Why did I miss this bill? How can I make sure I don’t miss it in the future?

To put it simply, it’s a bad financial move to not be able to handle an expected bill, particularly when it forces you to tap your emergency fund. Plan for it now so you’re not hurt by it later.

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  1. Becky says:

    I know Trent isn’t a big fan of services like Mint, but I found Mint to be a big help planning ahead for expenses like this.

    Once I’d been using Mint for a year, I could easily see how much I spent the previous year on things that didn’t happen monthly – property taxes, auto insurance, the dog’s annual vet visit – and things that I completely forget about when they aren’t happening, like snowplowing, AAA membership, and holiday travel.

    It was a shocking amount of money totaled up. So I divided it up to a certain amount each paycheck (not each month). That really helped it not seem so huge, and having it be a regular amount every check made it easier to squirrel away in savings before I felt rich after getting paid. :-) Another thing that helped is that since I knew I was setting it aside every month, I didn’t need as big a “safety cushion” in my budget to cover all the uh-ohs.

    When I first set this up, I did not have a year’s worth of Mint data, so I just did the best I could and, like Trent suggests, added some extra to cover whatever I had not thought of.

    I’m 42, have been on my own since 24, and this is the first time I’ve actually prepared ahead for these expenses other than getting nervous if my savings or checking account balance got below some vague “gut check” amount. I think that this one strategy has given me more financial peace and confidence than any other single step I have taken.

  2. krantcents says:

    Too many people use emergency funds as funds for the things they forgot or when they do something stupid. An emergency fund is truly for the unplanned expenses. If you really think about it there really isn’t anything you can not plan for. The surprise may be the amount. For example, car repairs for a 10 year old car, you know you need to plan for it, you just don’t know how much.

  3. Tanya says:

    Yesterday I read a blog – complete with a budget sheet – that talked about saving for the Christmas. Like that annual insurance bill, Christmas comes once a year, yet always seems to catch people by surprise. Planning for it is much better. In fact, I started by Christmas shopping this week.

  4. valleycat1 says:

    Hopefully once someone realizes they forgot to plan for the irregular expense & have to use their emergency fund, they’ll know in the future to plan to save for those. So, this time it is what the emergency fund will help them cover. They may have to reduce their rebuilding $ to emergency by the amount they need to be setting aside for next year.

  5. Sara says:

    There are many things which can be seen as common expenses that some see as emergencies. I would put car repair and health care in this category. Ideally, a budget should have money put to both of these categories on a monthly basis. Who goes through life without repair or medical bills? Same would go with house repairs if you are a homeowner. When I used to have a house with a septic, I budgeted the septic clean out even though we only did it every 4 years. That level of budgeting takes a while to get to but it sure makes life easier in the long run.

  6. Riki says:

    I have a separate Christmas account and save a certain amount each month, starting in January. It makes a HUGE difference to have the money set aside when November rolls around. I also start shopping early (and am currently about 40% done, actually) but there’s also alcohol, party food, and travel to pay for in December. I love to host big parties with lots of food, plan fun decor, and be generous with gifts but I never have to dip into credit to do so.

    Last year, I bought 8 pounds of chocolate chips.

  7. Brian Carr says:

    I was absolutely floored the other day when I saw a statistic that said nearly two out of every three Americans doesn’t have enough money in savings to cover just a $1,000 emergency expense.

    I understand stuff happens, but people should never let it get to this point. All the more reason why things like personal finance need to be a point of emphasis in primary education!

  8. Jules says:

    I never did understand why people were always surprised by Christmas. We set aside cash throughout the year for it–it’s much more satisfying to watch a wad of bills grow and grow.

  9. deRuiter says:

    As adults with everything we want (and more) we’ve stopped exchanging gifts with friends and family. Instead we get together with them around the holidays, or just before or after, for a meal either at home or at a restaurant, using the time we’d spend shopping and wrapping for things none of us need or want. It’s relaxing, we get to socialize with friends and loved ones, and the money spent if we choose a restaurant would have gone towards a gift. Christmas gifts are lovely for children, with the whole magic of Christmas bit. As an adult I’d rather spend time with friends instead of shopping and exchanging gifts we don’t need. If I need a new ice cream maker machine, I’d rather pick one up, brand new or used once, at a yard sale for $4. in the summer, than have a friend spend $75. on the same machine from the mall at Christmas.

  10. Sharon says:

    Yes, this focus more than any other financial strategy has given me peace of mind. In addition to the events mentioned above (such as Christmas, which ends up costing money even if you do it frugally), I also save a set amount for gifts, summer camps for the kiddos, and a twice-yearly clothes-shopping trip to the outlet malls at clearance time. I also highly recommend opening an account with a bank that will let you open unlimited free savings accounts. That way each one has its own special purpose; I find I’m more likely to reconsider any spending from my savings accounts if I can clearly see that I’m taking away “Christmas money” or “car insurance.”

  11. Irregular expenses fall in the fourth and final category. The four categories are: fixed monthly (house payment), variable monthly (utilities), more than once per month (groceries) and less than once per month. If an expense falls into the last category and it comes once per year, I put 1/12 of the amount in my monthly budget. My patented budgeting system virtually subtracts it from my available funds as it builds over the 12 months so I can’t spend it. That way when the bill comes, it’s there for the payment.

  12. Maria says:

    It’s unbelievable what some people consider an emergency. I have not tapped my EF for over five years.
    I realize emergencies happen, but there are very very few true EMERGENCIES that are completely unexpected.
    Even a car breakdown..if you are driving an older car out of warranty it would not be an emergency when it breaks down.. It should have been somewhat of a planned repair… everything breaks down, some sooner some later.

  13. sjw says:

    “This month, my annual insurance bill came due and I couldn’t make ends meet. I cleaned out my emergency fund. Then, at the end of the month, my car broke down. What’s the point of having an emergency fund? I’m in debt anyway.”

    We’re spending so much time explaining that the original author was Doing It Wrong that we lost sight of the great thing. They are “in debt anyway” because they used the emergency fund for the insurance bill. However, and this is a huge however, they are in debt to a lesser extent than they would have been if they had no emergency fund at all, and had to go into debt for both the car AND the insurance.

    This is still a buffer fund success story.

  14. Tracy says:

    I think sjw is making a great point – the letter writer is frustrated and upset and instead of pointing out that finances are in better shape than they would have been without the emergency fund and to keep pushing toward financial stability, there’s a lot of criticism because he or she isn’t there yet.

    These are writers that needs encouragement, not criticism, because they’re about to give up.

  15. My husband and I are still trying to pay off our debt and build our baby Emergency Fund. We decided that our old Durango needs new tires, and in the past we would have charged them to a credit card or emptied the small savings we have, but this time we planned ahead. So out of every paycheck I wrote myself a check for $50 to save for the tires. We treated it just like another bill. So now, 13 tire payments later, I can pay for those tires–with CASH!

    I love targeted savings. Our Christmas club account is heaven sent! We are going to beat this debt!!!

  16. mary w says:

    I try to spread out those regular recurring expenses so they don’t all hit at once. Property taxes are December and April. Christmas is January (the part that’s charged). I keep March clear in case I owe income taxes. I make sure that auto and home insurance are in different months.

    I realize some impound prop taxes and insurance but I’ve been burned before.

  17. BIll says:

    Your strategy number 2 is what my family uses. The day we started thinking of less than monthly bills as something we save for my life got better. I add up the bills divide by 12 and put the money away at the beginning of every month. The money is there when I need it and the stress that came from having to move money around and juggle bills went away. Life insurance, car insurance, kids camp, some vacation money, Christmas, property taxes, church obligations are all handled by this fund. This approach has been the one thing that has made my financial life easier over the last decade. It has worked in good years and bad.

  18. Liz says:

    I use strategy #2 as well, but with one minor modification. My house is heated with natural gas, which is also used to heat my hot water. In the summer, my gas bill averages $12, while in the winter it is easily 10 to 15 times that, depending on the weather and if I’m home during the day more (love those snow days!). Sure, I could use the budget plan, but I don’t want to tie my money up with the utility company. So I average my gas bill as well, dumping an extra $40, $50 or so into savings in the summer months, then pulling that money out during the winter.

  19. Ginger says:

    I don’t understand why people think a car repair, insurance, annual expenses in general are an emergency. You will have to do repairs, you will have to pay your insurance bill, start budgeting for it!

  20. Georgia says:

    I, too, use #2. I read a woman’s 2 book financial ideas about 20 years ago. It said to add all your semi- and annual bills, divide by 12, and save that till you needed it. This was the only actual piece of advice I took from her works and used through the years. I still do it to this day.

    I keep insurance, property taxes, medicines, sub-scriptions, etc. I keep another list of things that come out of my cc’s. This way I know each month how much will be coming in and going out.

    Instead of several different accounts, I just have 3 accounts on Emigrant-Direct. Since they only let you have one beneficiary, I set up one account for each kid. Then I have a separate account to save money for kids I support around the world. The two for my kids are used as an EF and as a savings vehicle. I try to save enough to be able to buy another used car, if I need one and for any repairs on my home.

  21. gardenurse says:

    I do something similar to Trent, but I had a hard time sticking to my own Excel categories. When I started reading 2 yrs ago, I took his advice and opened an ING Direct account.

    Now I have several accounts there, and make smaller monthly payments to each account-such as:
    -annual car insurance
    -emergency fund
    -feed (we have livestock, and it’s an irregular expense)
    -car repairs
    -home repairs

    You get the picture. These extra accounts don’t cost me any extra money, and it keeps me from dipping into other funds. It’s like an envelope system for bigger expenses and someone else keeps the tally. I can see what’s in each account every time I log in.

    The only downside to ING, is that it takes a few days to transfer the money back into my local bank account. That’s not so bad, as I know I’ll have that time when the insurance bill comes, and when it is due.

    The biggest thing is that I don’t sweat it, wondering where the money is coming from when that bill comes-it’s already there, waiting for me.

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