The foundation of solid financial planning starts with a budget. You may already have the fundamentals of a budget in place. You might even follow it closely every week, month, or year. Until one day something unexpected happens — a significant fender bender or an illness, for example — and suddenly you feel forced to abandon your budget altogether.
“The most important thing for anyone’s budget is built-in flexibility,” said Mayelin Alvarez, a financial professional with Coastal Wealth in Miami, Florida. “If your budget can’t change quickly to address outside factors — both good and bad — you may end up missing out on a lot of opportunities.”
When life hums along, it’s easier to follow your budget closely. But what about when it doesn’t?
The uncomfortable truth is many people aren’t prepared. Nearly one third of employed Americans have less than $1,000 saved for emergency expenses, according to one survey.1 That’s why an important part of family budgeting is allowing for creating and maintaining an emergency fund. (Learn more: Emergency fund basics)
But sometimes a sudden major expense can stretch beyond your “just-in-case” funds. These unexpected expenses could include:
· The breakdown of a vehicle critical to your job or business.
· A medical emergency for you or a loved one.
· Major damage to your home from a fire or storm.
Obviously, insurance can usually help with such situations. But often those funds can fall short of covering all the bills related to such events. And those costs are coming on top of the cost of regular living. And there are plenty of instances that fall between a major emergency expense and everyday costs — think appliance repair or traffic ticket.
That’s why creating a family budget that can handle life’s unexpected financial speedbumps requires more than focusing on money in and money out.
Control and categorize your expenses
To weather financial storms with your budget intact, it’s important to categorize and prioritize the variables you can control the most: your expenses.
Within each of the following categories, prioritize which expenses are absolutely essential and necessary, and those which are discretionary and could be sacrificed, in the event you need to free up money:
- For yourself: These can include gym memberships, hobbies, or recreational pursuits.
- For your family: These can include educational opportunities, vacation, or entertainment.
- For your community: These can include charitable giving or organizational memberships.
- For your career: These can include networking events, continuing education, or professional dues and subscriptions.
You may want to have a family financial huddle to discuss what matters most to everyone in each category. In the process, you might realize that some of your expenses can be eliminated now, and those freed up monies can be redirected to savings. Or they may have an added expense you hadn’t considered, such as an upcoming college reunion or needed sports equipment for a child.
Categorizing and prioritizing your expenses, possibly by developing a family budget planner, empowers you to make smarter choices. This new budgeting approach may also make you less likely to tap into savings or emergency funds to cover financial shocks.
Decisions about where to cut spending in a given month to cover an unexpected expense may become easier and automatic. Based on your priorities for each category, you can eliminate or make adjustments to lower-priority expenditures to cover the cost of fixing a broken water heater or an injured foot, without breaking your budget.
The bottom line is that you need to be prepared for unexpected costs. Looking at your budget through a priority lens for yourself, your family, your community and your career can help you better manage your day-to-day and month-to-month finances while keeping your long-term financial planning on track.
Learn more from MassMutual…
1 PWC, “9th annual Employee Financial Wellness Survey,” 2020.