Understanding Unexpected Expenses vs. Overlooked Costs

Even the most responsible and financially secure people get thrown off by unexpected expenses when they least expect it. Unexpected expenses are financial emergencies that arise without warning and that you couldn’t have seen coming.

On the other hand, overlooked costs are more like recurring bills or seasonal costs that perhaps you forgot about or neglected to factor into your budget. Examples are home maintenance needs, car repairs, annual subscriptions, and holiday gifts.

Both can derail your budget and require advance planning to stay on top of your finances. But since emergencies inherently can’t be predicted, how can you plan for unexpected expenses?

The financial pros at Tower Loan share information about what unexpected expenses are and how to handle them with a personal loan or other financial tool that works for you.

Identifying and Listing Potential Expenses

First, let’s answer the question, “What are unexpected expenses?” and explore where they might occur in your daily life.

Unexpected expense examples include a personal or family medical emergency, pet health issues, and a vehicle that won’t start to transport you to work. To be proactive about potential future emergencies, take a look at your bank statements and budgeting apps to identify any surprises that stand out from the past year.

You can create a comprehensive list of potential expenses that might take you by surprise in the future and place them into categories, such as home, auto, family, health, and seasonal. At this point, you may be able to forecast your monthly needs by noting typical months when your expenses tend to spike. This helps you prepare for unexpected expenses based on past patterns in your life.

Building Flexibility into Your Budget

What’s the best way to plan for unexpected expenses?

Being flexible with your finances is crucial for planning ahead for whatever life may throw your way. You can set up a miscellaneous fund and deposit a small amount into it each month to cover unforeseen minor expenses.

It may also help to create a month-specific category based on upcoming costs, such as higher landscaping bills in the spring, higher water usage in the summer, or higher electric bills in the winter. Update your budget regularly with new overlooked expenses that you discover over time so they become integrated into your annual budget and are less likely to catch you off guard.

Establishing Sinking Funds for Predictable Costs

Another strategy for handling unexpected expenses is to create a sinking fund to help pay for known costs you’re confident you’ll have in the future. These costs include things like holiday shopping, vacations, and routine automobile maintenance.

You can set up a separate sinking fund and dedicate a certain amount each month to it to reach your goals. This may look like saving $100 a month for future car repairs or a dream trip you want to take this year. Meanwhile, other people set up sinking funds so that property taxes don’t feel as burdensome when they receive that annual bill.

Creating and Growing an Emergency Fund

Emergency funds are solely dedicated to helping you pay for emergencies that arise in your life. This helps you prepare for unexpected expenses when you are injured in an accident and require extensive medical treatment. It can also be helpful if you suddenly lose your job and are left without an income.

To make this financial commitment more manageable, start with just a small fund of $500 to $1,000. Then, gradually grow it so that you can cover three to six months of your living expenses. Financial advisors typically suggest creating an emergency fund in an accessible, high-yield savings account so that you can get to it immediately when you need fast cash.

Proactive Strategies for Unexpected Expenses

Planning ahead for the unexpected isn’t paranoid; it’s wise and never a cause for regret.

If you share a household with family members, schedule monthly budget check-ins to review your budget and adjust it based on past bumps along the way that have deterred you from sticking to it.

When significant expenses arise, such as major home repairs or high medical bills, ask about payment plans with zero-interest options. Such plans can allow you to pay large bills over time without having accounts turned over to collections or unnecessarily sacrificing your emergency stash of money to clear the balance. 

It is also helpful to create a list of alternative funding options that could be available to you in case of an emergency. These options could include borrowing money from a life insurance policy, getting a salary advance through your job, or enrolling in an employee assistance program.

Utilizing Financial Resources Wisely

What’s the best way to pay for unplanned expenses? Fortunately, there are many financial tools that you can use to cover large costs that come out of nowhere.

For example, personal loans can help you cover large expenses and offer stability with fixed rates and predictable payment plans. At Tower Loan, our personal loans can be used for whatever you need money urgently for, such as medical bills, car repairs, and home improvements. It’s easy and convenient to apply for a loan online. However, you must make monthly payments on time or risk harming your credit.

Meanwhile, other people use credit cards to pay for unplanned expenses. With this approach, finding low-interest or 0% introductory rate options is important so that you don’t dig yourself into debt while handling an emergency.

Another option for some people is to borrow money from friends or family. Asking people you know for help can be embarrassing and awkward. However, you may be able to arrange a zero- or low-interest loan without damaging your relationship if you establish clear repayment terms to avoid potential conflicts.

Boosting Income and Reducing Expenses

When you’re faced with emergency costs, exploring additional income streams and earning extra money may also be feasible rather than tapping into your savings. Consider looking into freelancing, gig work, or selling items you don’t need from your home. You may be able to put your professional skills to good use while bringing in extra cash or by simply decluttering your home.

In a similar regard, emergency times are also opportunities to reevaluate your spending habits and cut back on unnecessary costs. Cutting out discretionary spending, such as dining out or subscribing to media services, can add flexibility to your budget so you can pay for more essential things.

Prioritizing and Decision-Making When an Expense Hits

It’s easy to fall into comfortable spending and saving patterns over time when everything is going smoothly and fitting within your budget. But when a random expense hits, it becomes crucial to prioritize and decide whether it is truly an emergency that requires special attention.

Before draining your emergency savings, ask yourself whether a new cost is genuinely unexpected, absolutely necessary, and extremely urgent. Consider all your payment options and decide whether you need to rely on your emergency fund, if you could use sinking funds instead, or whether just reducing current expenses could enable you to pay for them outright. 

Maintaining Financial Peace of Mind

Based on what you’ve learned in this article, which of the following is TRUE regarding unexpected expenses?

1. They only affect financially unstable people.
2. You can’t plan ahead for them.
3. Sinking funds aren’t helpful during emergencies.
4. Past patterns can help predict unexpected expenses.

If you answered D, you are correct because A, B, and C are false.

We hope you’ve found this discussion about how to plan for unexpected expenses helpful and are inspired to develop your own plan so that you are prepared for whatever may happen in the future. Remember that consistency is vital for financial peace of mind, and this involves regularly saving money throughout the year and being mindful of your budgeting habits.

Financial tools are available for tracking expenses and setting up funds for unexpected costs. One example is EveryDollar, a budgeting app that allows you to see all your accounts in one place and stream expense updates into your budget.

You can also use a sinking fund calculator to estimate expenses and decide how much you need to set aside each month from your paychecks.

Tower Loan is here to help if you need to take out a personal loan to cover emergency expenses. Our installment loans are flexible and predictable, and you can get your funds quickly with online instant approval. You can apply online today or stop by a branch near you to discuss your emergency financial needs with our friendly and knowledgeable staff.

However, the answer to “What’s the best way to plan for unexpected expenses?” varies from one person to another, depending on the nature of the emergency that arises. However you choose to handle unexpected expenses, just remember that advance planning goes a long way in keeping you financially comfortable and confident through life’s ups and downs.