What Hidden Costs Are You Paying, A Guide to Accounting for the Unexpected

by Investing School on August 17, 2012

Oftentimes when deciding how to spend your paycheck it is hard to account for the unforeseeable future. For example, what happens when an unexpected cost arises? Will you be ready? And how can you create a monthly budget that takes into account costs that you might not be looking for. This article will look at some possible hidden costs that can come up to help you be prepared.

Do you have a budget? Steps to starting a monthly budget.

One of the single, most important ways you can be prepared for expenses, both expected and unforeseen, is to make a monthly budget. Start your budget by going through your bills. These are the things that you know have to be paid on a certain date every month – no matter what. These are the expenses you can count on. Therefore, you can easily plan for them. Foreseeable expenses include rent or a monthly mortgage payment, utilities, car insurance, your monthly grocery bill, and gasoline for your vehicle. These costs will generally not fluctuate greatly from month to month. Once you have all your expenses listed, buffer your budget by adding a few dollars for the inevitable small changes due from price increases or taxes.

Next, add in an estimated amount for other expenses that may vary greatly from month to month. You could even create a miscellaneous expense category (for things like cigarettes if you are a smoker), snacks (if you are on the road a lot), or coffee. Calculate as many of these expenditures as possible to make your budget as accurate as possible. Consider including an Entertainment/Recreation/Leisure category. Expenses in this category would comprise going out to dinner or drinks with friends, renting movies or video games (if you’re a gamer), seeing a movie, or buying other supplies for your various hobbies, whatever those may be. Make a base estimate of what you normally spend. This is your monthly allowance.

You may already have a savings account that you add some money to every payday. If not, start this habit on your next paycheck. Be sure to your savings in your monthly budget.

Planning for unknown expenses: What are they and how do you do it?

By now you are probably thinking you don’t have much money left over. Just remember, you can adjust these amounts to suit your needs and wants as often as you like. Having a budget allows you to see what you are spending and where. With this information, you can cut back in areas that need less funds to allow more funds for other areas that need it. Something very important that most people don’t plan for is unforeseen circumstances. How can you plan for something that you don’t even know will happen? It’s really pretty easy, so let’s get started!

What are some possible unforeseen expenses?

If you are going to set money aside in your budget for something unforeseen, first think about the possibilities of what can go wrong. This will help you determine what some possible unforeseen expenses could be. You never know if your car will break down. There is also a possible hospital or unplanned doctor visit. Since you do not know if these things will happen or not, you should definitely put a certain percent of your paycheck aside for these expenses. Try to add up a few little things that are common: the cost of your doctor for an office visit, how much it would cost to replace a flat tire, money your children need for school functions. Once you have brainstormed on at least 4-5 things that might happen, put a price on those potential expenses. This is now your Unforeseen Expenses Budget. The best thing about this budget is that you can add funds to it until achieve a level of savings you feel comfortable with. From there, simply replace whatever money you have pulled from it. You may not have to add money to your Unforeseen Expenses Budget every month unless you are the kind of person that always has hidden costs. If that is cost, you may want to re-evaluate where your money is going and see if some of these “Unforeseen” expenditures are actually predictable. One way to do this is to simply save all your receipts and look at them at the end of the month. Alternatively, if you find yourself scrambling to repair your broken 1977 Mercedes sedan every other month, calculate out how much you spending annually to maintain your vehicle. Then, average this cost month monthly, and put that amount into your budget.

How much should be in a hidden expense budget?

In the end, the amount of money you have put back for hidden cost and extra expenses will be completely up to you. You will have to make a judgment call based on what you can afford, how much you think you will need, and what expenses you are willing to plan for – even though some of those expenses may not happen. When people talk about their savings account, they usually have enough money saved to live on for “three months of income or six months of expenses” in case they lose their income stream. This may because they lose their job, or became disabled and are unable to work. With the three/six month buffer, bills and known expenses covered for that amount of time, in the absence of future income. Unforeseen expenses can be viewed in the same light.

Earlier, I mentioned putting a price on any unexpected expense you can think of. Once you have done this, you can add as many of those unexpected expenses together as possible. Make this total your goal for this category in the budget. Save the amount you can afford toward this total every month. Once you have this total covered, you can choose to leave the money there and only replace it as it is used, or you can continue to add to it every month. One suggested amount is 10% of your pre-tax salary.

Planning for unforeseen expenses and hidden costs takes planning and thought, but it is not only possible, but pretty easy to be prepared for anything that can go wrong.

Jennifer Ricci works with the student loan consolidation assistance company Cedar Education Lending. Her work allows her to write about financial concerns and help students manage their budgets.

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