Budget and Forecasting: Dealing with Nasty Surprises
This article follows on from some questions that arose out of my article on Multi-Pot Budgeting, and what to do when something turns up that I DON’T have a budget category for ?
Today, I’m going to share what has worked best for me. This approach has single handedly given me the greatest financial stress relief. It’s enabled me to move from feeling
Welcome to My “Oh Sh!t” pot for Budgeting and Forecasting for nasty surprises
Simply put, create a separate budget category just for this type of situation. In our family we’ve affectionately dubbed it the “Oh Sh!t” pot. You are planning for when you don’t have a plan 🙂 sneaky huh! Makes sense right ?
This new forecasting pot follows the same rules as ANY other budget pot, set the goal, putting money in each month until you reach your goal amount, track deposits/spending for the pot.
It’s not your savings!!
IMPORTANT. I do not class the “Oh Sh!t” pot as savings of any kind. It is a specific pot, with a specific purpose. Any savings for any other purpose should have its own category.
To start, I recommend guesstimating the kind of amount that could hit you out of the blue within a 12 month period, You can always increase it year on year as you get used to the approach…. for me in the 1st year this was $500. I’ve increased it over several years to now stand at $2000. It should be a figure you are comfortable will cover a few unknowns. The bigger the goal amount the greater the peace of mind.
When the storm hits
The power to budgeting and forecasting, as always, is in the execution of the approach. What you do when a situation comes up or in this case AFTER we’ve settled the bill/situation. The key is to learn from each circumstance that presents itself and take action based upon what we have learned. Here’s my recommended approach.
- Pay the bill from our buffer pot
- Create a new budget category for the situation that has just occurred.
Understand that this situation can happen again, it’s now no longer unexpected, even if you think it could only happen once every 2,5,10 years etc. PLAN FOR IT
- Set the goal amount at the level you have just encountered
- Start saving monthly to this new category for when/if it happens again
At the end of the year
- Adjust the goal level of the “Oh Sh!t” pot to match the demands from the year. (usually only move the goal upwards)
- Ensure you have new categories for all the spend you made from this pot for the year
- Allocate the appropriate budget to these new categories
Peace of mind
The buffer the “Oh Sh!t” pot provides, means you are far less likely to have to dip into some of your less critical pots to pay unexpected bills. Because of this, the pot gives me one of the greatest stress buffers. I know that if I get a unexpected bill, or problem occurs, I can handle some or all of it without affecting any of my other plans/pots.
Thanks for reading in, I’m really looking forward to hearing your comments and experiences on how you have implemented this approach.