Does it seem like just when you commit to starting a budget, along comes a trip to the ER, a phone that quits working, or some other expense beyond your control happens?
It completely derails your finances or forces you to scratch your budgeting plan for the month. Maybe it even makes you want to give up and try the whole budgeting thing again next New Year.
If So, You are Not Alone.
A U.S. Bank study revealed only 41 percent of Americans keep a budget. There are several reasons why including setting unrealistic spending limits, creating too strict of a budget, and not leaving any wiggle room for small unplanned purchases.
But nothing can throw off a budget like having to deal with financial emergencies. Unexpected events are especially problematic because nearly 80 percent of us are living paycheck to paycheck, and 58 percent have less than $1,000 set aside for emergency expenses.
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What can we do to keep life’s chaos from ruining our budgets? Read the three tips below to find out.
Squirrel Away Money
Emergency funds can be the lifeline you need to get through financial hardships that catch you by surprise.
When your goal is to get out of debt and live within your means, an emergency fund gives you quick access to interest-free cash and provides an alternative to taking out high-interest loans or racking up charges on your credit card.
Most unexpected expenses don’t cost thousands. They are usually only a couple of hundred dollars. Maybe you missed a few days of work due to an illness or your car battery died. Perhaps a child flushed an action figure down the toilet, and now the plumber needs to be called.
Having a small emergency fund of even just $1,000 will safeguard these minor financial surprises from stressing you out and turning your budget upside down.
The ultimate goal is to eventually fully fund an emergency account with at least three months of living expenses, though six to 12 months may be ideal depending on your situation. Living expenses are essential costs that can’t be cut out of your budget when money is tight like mortgages, rent, groceries, health and other insurances, and utilities.
Knowing you have this financial cushion prevents panic and anxiety from crippling you during major life transitions and financial charges like being laid off, recovering from a chronic illness or extensive surgery, or home repairs you were unprepared for.
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How to Get Started on Your Emergency Savings Account
To get started, create a separate savings account. Because savings accounts only allow for six withdrawals per month, you’ll think twice before making transfers.
The easiest way to build up your fund without changing your lifestyle is to store away the extra money you receive throughout the year. Bonuses raise, tips, refunds, and cash gifts, can add up to thousands of dollars.
Another trick is to create automatic withdrawals into your savings account coinciding with your payday schedule.
Chances are, if you plan on stashing away what’s left at the end of the month, there won’t be anything to save. It’s easier to take from the top and make slight adjustments to your living expenses to stay within your means.
Many expenses and large purchases that throw you off for the month can be saved for ahead of time like membership and subscription renewals, computer purchases, and holiday and birthday shopping.
To prevent being blindsided by these expenses, take a look at credit card bills and bank statements for the past year and make a list of what items it would be a good idea to save for, and how much you’ll need to set aside each month to cover them when they come up. Then, incorporated those amounts into your monthly budget plan.
Apps like You Need A Budget (YNAB) and Mint make it easy to use your checking account to keep track of your savings for various items.
Any leftover or unused money can be sent or spent elsewhere to bring you closer to your financial goals.
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Chip Away at Debts
Having multiple debts to pay each month can leave you with little flexibility in your budget to handle life’s unexpected circumstances. They drain your discretionary income and divert money away from crucial savings goals like your emergency fund or a down payment for a home.
High-interest rates on debts like credit cards and student loans cause you to pay much more than the original price of the item or service. But what’s worse is that paying down your principal becomes almost impossible as the majority of your minimum payment goes towards interest.
Making a concentrated effort to get rid of these money-draining debts creates a snowball effect that makes cash available to spend on things that matter in your life.
Some people like to tackle high-interest bills first and work their way down to ones with lower interest rates. This saves thousands or more over the life of a loan.
Others like to start by getting rid of bills with the lowest balance as fast as possible. This keeps motivation strong with quick wins that give a psychological boost to keep going.
Encouraged by the progress, many take monthly payment amounts from bills they just finished paying and combine them with the minimum payments they were already making on the second smallest bill. Before they know it, they’ve paid down most or all of their debts faster than they ever imagined possible.
No matter which method you choose, paying down your debts frees you up financially to keep your budget in check when surprise expenses want to destroy your finances.
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Life is chaotic, and sometimes we need to spend money we didn’t plan for. But, by having an emergency fund, budgeting for future costs, and actively working to pay outstanding debts, we don’t have to cede control of our budgets to mayhem.
We can protect our financial standing and still be closer than ever to our financial goals. What types of expenses tend to throw your budget for a loop? What strategies have helped you stick with your monthly budget? Share your experiences below!