It’s very easy to get off track. You’re humming along, living on a budget – even making payments to pay down your debt – YES, you are on the road to financial freedom! And then it happens…
You receive that huge bill or a major ‘unexpected’ expense hammers you, and throws off all your diligence of being frugal, saving, and eliminating debt. It happens to us all and there is very little to do in order to avoid it – but – you can plan for it and lighten the burden.
Plan it out
The 8th money principle is to plan your unexpected expenses and big yearly purchases. This concept is not talked about much, but is critical to keep you on track living frugally. The value you get from planning out your expenses is that you will stay on budget, continue to pay off debt, and not lose steam in in your financial quest for freedom. In many ways it is your secret weapon to keep momentum moving forward.
Step 1: Figure it out…
Your first step to planning for expenses is to figure out all the larger purchases or expenses that you will encounter throughout the year. These are expenses that you will not experience month to month routinely. (don’t forget big purchases!) Some examples will be christmas expenses, birthdays, life insurance, auto insurance, vacation expenses, running shoes, car repairs, home repairs, camp for the kids, etc. They can be either yearly expenses, quarterly expenses, or somewhat random expenses throughout the year.
Take a moment to plan for these expenses. Track them all down on a spreadsheet and figure out the total. Be sure you are accurate and have accounted for everything. This is an important step in budgeting that can’t be overlooked, as to live on a budget requires you account for these irregular expenses.
Once you have them all documented, it is time to figure out your monthly burden – so divide by 12 and figure out your average monthly expense based on everything. Include this in your budget number and hold onto it for now… (we’ll use it later).
Step 2: Start with a emergency savings account
The second step is to create what I call ‘emergency savings’. The purpose of this savings account is to allow you to have a cushion while you are living on a budget, just in case an unexpected expense occurs that requires you to spend some cash you haven’t planned for step 1. You can then pull from this fund to pay your current expense, and continue on living without derailing your debt elimination plan or just your frugal lifestyle.
How much should you save? I typically recommend having at least a thousand in your ‘emergency savings’ account. Remember, the goal here is to keep you on target and not ‘derail’ your current financial plan of eliminating debt or living frugally. You need enough to accomplish this which is why I recommend roughly 1-2 thousand – any more can be used to pay off debt right away – so working with the balance is really something you need to determine in your own situation.
Step 3: Auto-Transfer to savings to cover these expenses
Now take the budget number from step 1 and begin saving this automatically every month. I recommend creating a recurring automatic transfer from your primary checking into this savings account. The beauty of this, is that it insures you will have the money available when the expense hits you and won’t knock you off guard. You won’t have to think about moving it, and will begin living without the money – thus creating the ‘easy button’ for saving.
This method is truly magic and will keep you on budget. The second benefit is that it will keep you from using debt to pay for planned expenses – which will in turn keep the expenses lower as you will never have to pay interest on that special vacation or Christmas gifts.
The third benefit is the freedom it provides to pay for everything with money in hand. When you’re paying for everything with credit, you are immediately in the hole and have the obligation to pay back. This creates the overwhelming feeling of ‘financial oppression’, which is why everyone hates debt. By paying with cash, you won’t experience this oppressive feeling, and instead will have a sense of freedom and control. (you can thank me later)
This freedom is what you’ll feel when you get out of debt completely, control your spending, and live frugally. Believe me – It’s great to be financially free!