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? Forty percent of Americans do not have the cash on hand to absorb an unexpected expense of $400, according to a 2017 report by the Federal Reserve.1 That’s why an important part of 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. That’s why creating a budget that can handle life’s unexpected financial speedbumps requires more than focusing on money in and money out.
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 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.
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1 Federal Reserve, “Report on the Economic Well-Being of U.S. Households in 2017,” May 2018.