Emergencies

 You'll notice that I don't have a category in the budget called "Emergencies". Why is that? Because personally, I think that real, true emergencies are more rare than we think. And we need to gain control of what's happening right now.

For example - "The transmission went out and now we have to spend $2400 on a new one!" - is that really an emergency?

We know automotive maintenance and repair is part of owning a car - and we know that eventually we'll need to replace the tires, or get an oil change, or pay for an unplanned transmission repair. That's what the "Automotive" category is for:

You'll notice it wasn't in the budget originally. I did have to adjust some other categories downward to accommodate the additional expense, but I want to stress that the budget is a living document. It is going to change, shift, and adapt as our lives and priorities change. 

So we allocate $50 every month to "Automotive" - what do we do in a month when we don't actually spend that much, or any at all in that category? That $50 rolls over into the next month, and you allocate another $50, and so on, every month, spending as you need to and saving the rest for the inevitable "emergency" repair. "Ok", so you say, "I have $250 saved up, but now I need that repair! What am I supposed to do, I don't have $2400 saved up..." It's ok. Having to put $2150 on a credit card is much better than having to put $2400. And over time, with more saving strategies in the Automotive and other categories, you'll be able to absorb the "unplanned but not unexpected" expenses that life throws at us.

You'll also notice that I have a category called "Forgotten":

What is that for? Well, quite often during the month, there will be a bill or expense that I just plain forgot about, and "Forgotten" is a catch-all for those sorts of things. Small, minor expenses that weren't, or didn't, fit into any of the regular categories. If I find that there is a reoccurring "forgotten" expense every single month, I should probably evaluate that expense and likely create a category for it, and adjust my budget to accommodate it.

Financial Gurus such as Dave Ramsey and others advocate setting up an Emergency Fund, often as the first thing you do - Ramsey says to set aside $1000 as soon as you can, and then build an Emergency Fund as you fine tune your budget and spending. Then build a cushion of one to six months of income, to help if you lose your job.

Those are great ideas, and if it will give you peace of mind then go for it. But my goal, right now, is to get you setting up and using a budget for today. We need to get our heads above water, and start treading, then we can start swimming and start planning for future spending (aka saving).

Again I'll touch on the point I made at the beginning of this post - most of the "Emergencies" we experience are unplanned, but not unexpected. By embracing our true expenses, and thinking about what we need long term, we'll have far fewer emergencies. And once we've broken the paycheck-to-paycheck cycle, we can start building towards that extra cushion to handle whatever life throws at us.

As we progress with our budget, particularly when we've making headway by absolving our debt, we'll be "aging our money" - that is to say, we'll be increasing the time between when we've earned our money, and we spend our money. By increasing this time, you're stepping towards breaking the paycheck-to-paycheck cycle.

When you're living paycheck-to-paycheck, there's no way to have any sort of "savings" for when an unplanned expense occurs. But if you've managed to age your money, you'll have a buffer to absorb those unplanned hits.

The best analogy I've read was stated by Jesse Meacham, author of "You Need a Budget" - basically he said to think of your bank account like one of those cereal dispensers at the buffet - you know the ones with a big opening at the top, and a little opening at the bottom. As you pour cereal into the top, only a certain amount can be dispensed at the bottom - your money is the cereal. As long as your pouring more in the top then what's coming out of the bottom, the amount of cereal in that dispenser will continue to grow. If you need two bowls at some point, you'll have plenty of cereal to take from.

Another strategy you could use to get you ahead, and break free from the paycheck-to-paycheck cycle is to create a category and call it "month ahead" - and save up enough in it to cover one month of your income. Once you've filled that category, roll that amount into all your remaining categories. Now you are truly free from living paycheck-to-paycheck.