Budgeting is a big deal when you’re working on taking care of big debt. Since we switched to YNAB (YouNeedABudget, for long) our budget has never been healthier. We’ve learned to effectively budget down to zero, to maximize our debt repayment and to live on last month’s income.
A robust budget should be able to handle unexpected expenses too. While you don’t know what the expenses will be or how much they’ll cost, you should learn to expect unexpected expenses.
Here are three effective ways we use our budget to handle unexpected expenses:
1. Change How Your Money is Allocated
Most normal, small-ish unexpected expenses you handle by changing the way you have allocated your money. For example, if there is killer deal that comes up on men’s suits (my husband really needs a new one), but we only have $25 allotted for clothes that month, we will have to take money from other categories if we decide that the suit purchase is a higher priority that other things in our budget. For example, we could take $100 from grocery, $10 from entertainment, and so on until we had enough to cover the purchase.
Since we are putting everything extra toward our huge debt goal, we also have two debt payment categories: one for our beginning of the month debt payment and another for our end of the month debt payment (you can read the details of that plan here). Most likely we would have enough in our end of the month payment category to cover the suit purchase if we thought it was a deal that we would have to act on now. If it wasn’t time-sensitive, we would plan it into next month’s budget.
For people who aren’t doing a debt payoff like we are, the unspent money in each budget category would either roll over to the same category for next month (sink funds) to make growing balances OR would go toward savings (or another goal).
2. Split the Cost with Next Month’s Budget
When we have big, unexpected expenses like the recent auto-withdrawal of a student loan payment, we have a couple options because we are living on last month’s income. In July we had an unexpected automatic withdrawal from our checking account because we were removed from the income-based repayment plan for not renewing our status on time. The withdrawal of $697 happened on the 21st of the month, so it was too late to just grab that much from the then-unspent portions of other categories.
We had around $290 in our “end-of-the-month debt payment” category that helped to offset the blow since that was money was allocated to debt payoff anyway.
To cover the remaining $407, YNAB gives us two ways we could share the cost with our next month’s budget. A) Subtract from next month’s “available-to-budget” or B) Subtract from next month’s “category balance.”
With option A, the $407 would be taken out of the total amount that we have available to budget for August.
Option B keeps the -$407 in the category that had the overspending. The negative number would carry over into the category balance for the next month unless/until it is reconciled (see reconciled screenshot below).
I chose option B because I like having everything taken care of cleanly at the category level so it’s easy to follow what happened. In order to keep the debt area of our budget nice and neat, I added a new category (under the main category “Debt”) called “Surprise Loan Payment.” After August is over, I will hide that category so I don’t have to see it all the time, but I really liked being able to see exactly how we handled the unexpected expense.
Once again, neither of these options would be available if we weren’t already living on last month’s income. Being able to split unexpected costs with next month’s budget only works because we have an extra month’s worth of income sitting in our checking account.
3. Hit Up the Emergency Fund
A third option is to use our emergency fund. We try to reserve using our emergency fund only if all other options won’t work. If we couldn’t pull money we need from other budget categories and we couldn’t correct the overspending in the month after the it occurred (or we weren’t living on last month’s income), we would use our emergency fund to cover the expense.
In our real-life example of having an unexpected withdrawal of a student loan payment, the emergency fund would not have saved us. We did not know the withdrawal was going to happen, so we wouldn’t have had time to transfer money into our checking account. We really were just saved because we had a month’s worth of extra income sitting in our checking account.
Live and Learn
Unfortunately, we are getting extra experience in managing unexpected expenses. After the unexpected student loan withdrawal in July, my husband’s car was broken into in August! The fun never ends!
If you are interested in trying out YNAB, which I obviously totally recommend, you can get it free for 34 days!
How about you?
- How do you manage unexpected expenses without breaking your budget?
When I got sick last June, I used my emergency fund because I really needed to do that. I was out of budget and my expenses were really crazy. Right now, I’m trying to fix it again.
Restocking the emergency fund is always a challenge!
I mostly try to solve the unexpected expenses on the category level as well, but some times, I’ll take it from next month’s “available to budget” – it depends on the category. If it’s a larger than expected insurance bill, I generally take it from next month’s category. If it’s a “surprise” (like your car being broken into), I generally take it from other categories where I can, then from next month’s available to budget.
It’s nice to have some options!
Before using YNAB we would just dip into the emergency fund for any (and all) unexpected expenses. That was probably why we felt like the emergency fund never grew!
Now that we are using YNAB we do the same as you. We mostly try to solve it on a category level as well. We have our budget set up in four categories:
Monthly Bills (rent, gym membership, Insurance, etc.)
Every Day Expenses (Food, Gas, Household Goods, etc.)
Yearly Expenses-Sinking funds (Vet Visit, Eye Doctor, etc.)
Savings Goals (house, eventual car replacement, vacation, continuing education, etc.)
We try to only move money around within the category to cover the expense, then we go to the category beneath, and so on. Moving from the “Savings Goals” category is the last resort.
I don’t think we have ever moved money from the “Next Month’s Available to Budget” because I like to know where the money went!
That’s great to try to use money within the same general category and to have a “hierarchy” or categories, so that your savings goals are the last to be touched! Way to go CeCee! Sounds like a great plan!