Define Contingency
A contingency is “a future event or circumstance which is possible but cannot be predicted with certainty.”
If life were certain, then, we would not have accidents, emergencies, or any other surprises that might affect our budget or time schedule.
Good Planning
Well-managed companies will have funds set aside, along with a plan, to cover such things as production interruption from a power outage or storm damage, a lull in sales from the loss of a big account, etc.
Your personal budget should have some sort of contingency plan attached to it. It may be small, at first, but as you get better at saving money, you can add some security to your budget by labeling a portion of your savings as a contingency fund.
Saving $3k to $5k for emergencies is a good general plan. However, how do you know that will be enough? For most emergencies and unexpected auto repairs that will be enough.
Consider this, though, do you have enough to cover your livings expenses if you lose your job and are unemployed for three months or more? If you hit a deer on the highway, will you have enough to replace that vehicle and cover your transportation needs until you get your replacement? What about storm damage to your house or if the sewer backs up? I have experienced all those. I know they are “possible but cannot be predicted.”
For you to be prepared some good planning is necessary. Depending on your circumstances, you can consider what might happen beyond the norm. Then, estimate what it would cost to get you past the event without doing much harm to your current budget.
Money Controls
We budget to control our money. However, some line items in our budget can be affected by the actions of others. You may lose control of your budget for a while.
Like what? A job loss due to a decision to cut labor costs. A utility cost increase to cover major capital projects. An increase in the price of fuel for your auto due to world events. I am sure you could think of other examples.
So How Do I Start?
The concept of saving for contingencies is a more advanced notion for personal budgets. However, once you get serious about saving, it is a natural progression to protect the way you budget and to build in a regular savings amount.
The progression can be like this:
1. Start by saving $1,000.
2. Pay your debt down until you can build payments to yourself instead. Then, pay yourself first!
3. Start with savings 10% of your take-home pay.
4. Reduce your living expenses or increase your income to be able to live on 70% of your take-home pay.
5. Take care of contingencies and retirement and leave room for generosity by saving and investing 30% or more of your take-home pay.
I know that sounds impossible but note that this is a progression. You will improve your money management each month until you get there. Make it a goal and you can make it real!
Build a Plan
You must stop and think to build a plan. You will never get past thinking paycheck to paycheck until you think about a plan to stop that.
We spend more than we think because we do not think about what we spend.
Stop and think about how you spend your money. Do you think about limits? Do you consider what you need versus what you want to buy? Do you need that much? Can you delay some purchases?
Spending money can be easy when there are no mental restrictions. That is why credit card bills get so high. Remember, that is debt. Things you got without paying for it—yet!
Avoiding debt is a great contingency plan. There will be less to worry about next month!
Your plan is a vision of how you should spend your money. It becomes your goal. And like any goal it will become easier to see as you add experience and refine the details to reach your goal. Do not avoid the truth in your numbers!
Budget for Contingencies
A budget is your reality. That is a picture of how far your money will go.
Contingencies not funded will push you into debt. Do you like being pushed around? If not, then, start saving as a defense against contingencies!
A large savings account becomes the wall around your budget that keeps out things that can disrupt your life. You will have things come up but being able to pay for it and still be able to buy groceries is a great feeling!
Build a Wall
Building that wall of savings around your budget plan will take as much time as you allow to do it. If you never allow yourself to do it, it will never happen, which is the case for most people without a plan to budget.
You will do what you tell yourself to do each day. A defined effort will lead to progress. Daily decisions accumulate.
Start with simple steps like fixing your lunch instead of eating out. Plan your purchases to know when sales occur or when you see a better price. If you delay bigger purchases, you can avoid using debt and save on interest (and look for a sale!).
Yes, those steps take time and effort. They are a test of your determination to be in control of your money!
As you get better at saving while spending, you will make more available to save. And, as you learn to invest, you will make your savings grow faster.
Then, when your savings have grown enough to be able to cover the cost of most contingencies that may pop up, you will have built the wall around your budget that will help you enjoy a better financial future!