How do I budget for unforeseen costs?

Hi anon

In life, there are often unexpected expenses, and more frequently the issue tends to be we didn't budget for some of these expenses. No one is perfect, and no budget is perfect either, it is very common to have things you didn't plan for (the example you listed is fairly small and can be handled, some people on the other hand, didn't expect babies).

Simply put you need a sinking fund for long term expenses (eg replace hp once every 2-3 years).

In my own situation, I have about 6 sinking funds covering different purpose. If I were to encounter the two cases you listed, then

A) my first solution is to handle it from my weekly allowance - by scrimping a bit here and there (eat cheaper stuff / skip a movie or coffee), I would try to cough out some monies to cover either bill.

B) if what I saved from above is not enough, I would dip into my Rewards fund (for travel or replace gadgets) to pay for them.

My six sinking funds / savings goals are
1. Rewards (generally for travel or to reward myself)
2. Family (buy new furniture / prepare for family emergencies)
3. Retirement (put to SRS or cpf)
4. Warchest (buy stocks / reits)
5. Debt - to buy savings bonds or pay down mortgage
6. Unemployment or emergency reserve

How to implement sinking fund?
I use OCBC savings goals, and set them to save a couple of hundred to each of my sinking fund / savings goals on the day after I receive my salary.

The savings goal give an easily viewable balance so I can sort of control my spending.

Different FCs will advice you on different savings ratio but they all have the same gist - set aside a sum of money (typically 10% to 20% monthly income) that is always liquid for emergency purposes.

If the unforeseen circumstances are disability, personal accidents or critical illnesses, you can always take up insurance to transfer the risk to the insurer. This is the easy part - you just need to have your plans set in place.
However, there are also unforeseen circumstances that are uninsurable (i.e. an elderly parent who does not have insurance and who is currently unable to purchase insurance falling critically ill and requiring long term care) or a sudden loss of income due to retrenchment. In these circumstances, your emergency funds will come into action to help you through those periods.

You can either set these emergency funds aside in the banks or in plans that allow you flexibility of taking out monies when you need it.

I normally advice my clients to set aside at least 10% of their monthly income for emergency savings (or to have at least 6 months of their monthly income in liquid savings). This is so that they know that they can at least have an income replacement of 6 months should uninsurable unforeseen circumstances occur.

Hope this helps!