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Everyone is full of optimism and determination at the beginning of a new year, or even at the beginning of a new attempt to begin taking control of their personal finances.
It’s an exciting time, endless possibilities stretching onward in perfectly organized columns.
Unfortunately, the reason so many people fail when they attempt to reign in their spending, pay off existing debt, or start a retirement fund is their inability to expect the unexpected and to then effectively cope with it when it occurs.
1. Discretionary Funds
The best way to roll with the financial punches is to be prepared. To do this you need a monthly discretionary fund. This will be money that is not supposed to go anywhere specifically. Perhaps this seems counterintuitive at first to those new to budgeting. However, this money can be funneled into a designated location such as savings, debt repayment, or retirement if it isn’t needed during the month.
Discretionary funds allow you the freedom of having an unexpected expense such as a doctor’s visit, auto repairs, or a forgotten birthday gift without blowing other areas of the budget. It is important to realize that it is impossible to plan for every eventuality but it is possible to be better prepared to adapt to whatever happens.
What about people who say they created a budget and there simply isn’t room for a discretionary funds category. It’s unlikely that there is nothing in the budget that can’t be trimmed. For example, people who have cable, Netflix, Hulu, a music service subscription, and other monthly entertainment costs could give up one or more of these services in order to have some money budgeted for unexpected expenses. Somewhere in your budget, unless you are truly only making enough money to meet basic survival needs, there is room to trim back and begin preparing for those things you can’t see coming.
2. Emergency Funds
Creating a savings account specifically for emergencies is another great way to prepare for the unexpected. There are several painless ways to build these funds each month. Funnel leftover discretionary funds as well as any budgeted money that wasn’t needed from other areas. During the Spring and Fall, you may find that bills from utility companies are lower than your monthly budget allows for or that during the winter your transportation costs went down due to inclement weather that prevented travel. Take that money and transfer it at the end of the month to your designated emergency savings account.
Too often, people will look at this “found” money as an excuse to treat themselves. By changing one’s mindset to see each of these unexpected mini financial windfalls as a way to prepare for the next emergency, it is possible to slowly and easily put aside enough money to cover unbudgeted expenses. Even those who do manage to set up an emergency fund will begin to be tempted by the money that is simply sitting there waiting for some undefined point in the future. One way to counter that mindset is to have a goal amount to work towards. Once that goal is reached, begin funneling unused money to a new goal that will provide a greater level of enjoyment, such as a new car, vacation, or upgrade to some other area of your life.
Budgeting isn’t something that is easy or fun for most people. It is a skill that requires the same dedication and practice to master as any other. By constantly adjusting methodologies and goals to reflect what works for you and what you want to achieve it can be one of the most useful skills you will ever develop.