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Financial Planning

Dealing with erratic expenses

Authored by Neha Kalia, Consultant-The AZAD Programme

You probably earn a fairly steady monthly income. But are your expenses steady too? Does an unusually high electricity bill in the peak of summer throw you into a tizzy? Do you get really upset when there are a string of birthdays and marriages and you have to shell out big bucks for the presents/shagan? Are you consumed with worry when a water pipe bursts in your house and you have to pay to get it fixed?

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If you answered yes to any of these questions, it means that you are quite unprepared for unexpected expenses.

The strange thing about unexpected expenses is that they are not all that unexpected. They may take you by surprise but if you look back over the years you’ll see that they actually crop up like clockwork. Their nature may vary from time to time but you can count on something unexpected coming along every couple of months. The more variables there are in your life like kids, house, car etc. the more likely it is that they will be frequent.

Does this mean that you will forever be at the mercy of the vagaries of life? How do you plan for everything that could go wrong? It’s simple. You don’t! You basically plan that ‘something’ will go wrong (or come up) and catch you off guard.

So all you have to do is recognize this fact, look at your past history and decide how much money you will have to set aside to meet these ‘unforeseen expenses’.

For those familiar with basic accounting, it is akin to creating a ‘’Provision” for Unforeseen Expenses. Basically if you put aside say Rs 2,000 each month, by the end of the year you will have a corpus of Rs 24,000 to meet any unforeseen expenditure. Of course it is unlikely that you will actually have Rs 24,000 because over 12 months you will certainly need to draw down the corpus as and when you encounter unforeseen expenses. What this system does, is that it allows you to have access to accumulated funds in a month when expenses exceed your income.

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In the months when there are no surprise expenses, there will be a tendency to dip into this fund for discretionary expenses like a day at the spa or a fancy meal or a weekend getaway. And that’s where your discipline and commitment come into play. The best way to resist such temptations is to put this money away in an account that you don’t usually access and one that you don’t have a debit card for! This way if the money cannot be accessed easily, hopefully the impulse to spend it will die a swift death.

Depending on the amount you decide to put into reserve each month, you can even get your bank to set up standing instructions (automated instructions) to put the money into a monthly fixed deposit each month. This way the funds are there when you need them but it will take a bit of an effort from your end to take them out thus hopefully ensuring that you will do it only when you really need to take care of some unavoidable and unforeseeable expenses.

So with a little foresight, planning and discipline you can take the bite out of unexpected bills and take them in your stride!

 

 

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