How much headroom?

May 11, 2009 9:32 AM

Household-budgeting-filter: how can I determine how much "wiggle room" or safety margin will be needed to cover unexpected expenses? How much do you allow, and has it been sufficient?

I'm budgeting for a family of three (couple + small child), but I'd be interested in examples from all shapes and sizes of households. Obviously, it'd be best to wait a few months and then figure it out empirically from actual spending patterns, but a combo of recent lifestyle changes plus imminent large purchasing decisions means that we really need prospective numbers now.

Oh, and assume that there's already 6 months of income in an emergency fund to hedge against really big misfortunes; I'm mostly talking about planning for that unexpected $100 wedding gift you have to buy, the $200 fender-bender, etc. Both direct advice and examples from experience would be much appreciated. Thanks!

posted by yersinia to work & money (15 comments total)

Emergency money that you should have on hand in savings is 3 months of living expenses (or how ever long it you expect it to take you to find a new job), your yearly deductibles on insurances, and about 1k per car that is over 5 years old. Child expenses in the event of an unfortunate event for child care I would plan two weeks at most. Gifts are a huge variable, I am not a gift giver - people just expect me to not give gifts because I'm a grouch. But assume everyone in your family/friends gets 3 gifts a year birthday/anniversaries/ and xmas - parents get 4 (mom, pops day.) Party/wedding gifts, I figure one per month. Also assume that one appliance/computer/tv or household item is going to break per year.
posted by bigmusic at 9:49 AM on May 11 [4 favorites]

My prior comment of course assumes that you have all the basic insurances - life, auto, heath, home, and disability.
posted by bigmusic at 9:52 AM on May 11

If you have pets, budget about $600 per year ($50/month) per pet. I don't have any citations for this, but I've had pets for my entire adult life and it always seems to work out to be about this much per year.
posted by rabbitrabbit at 10:02 AM on May 11 [1 favorite]

Oh, and assume that there's already 6 months of income in an emergency fund to hedge against really big misfortunes

If you've got six months of income in liquid assets, $100 for an unexpected wedding gift is not going to make much of a dent in that. Just remember to replenish whatever you take out, as soon as is reasonably possible.

Obviously, it'd be best to wait a few months and then figure it out empirically from actual spending patterns

Your current buffer allows you the luxury to do this.
posted by Flunkie at 10:05 AM on May 11

Three months expenses is what all the kids say, but almost no one has that in the US. As an absolute minimum amount I would calculate is: How much would it cost for you and your family to travel across the country to a family emergency. That's airfare, car rental, hotel, and food for 7 days, all at the increased "Didn't have time to research on the internet and just bought it today" price. But if you've got 6 months worth, put that in an interest bearing account and relax.

There are a lot of variable that can change the "3 month" rule. Is there more than one person in the house employed (At a different company)? You can drop it down a bit. Is someone self employed? Raise it. Work hourly or seasonally? Don't have all the insurance you should have? Raise it. Someone planning to change jobs or careers? Raise it. Planning to move? Raise it. Got your house and cars paid off? Lower it. Leaving family planning in Gods hands? Raise it. (etc, etc, etc.)

Presents shouldn't be unexpected expenses. You knew they were getting married, right? (If not, why are you getting them a present?) You should have enough room in your monthly budget for stuff like that, that's not what your emergency fund is for. If you have a hard time sticking to a budget like that set up an automatic transfer into savings. Budgeting is essentially planning. You've got a worthwhile budget when you know where you money is going.
posted by Ookseer at 10:18 AM on May 11

$1000 until you are debt free then 3-6 months of expenses (which will be less when you have no debt).

From Dave Ramsey's "Baby Steps" (it's what I used to get debt free an has been a terrific set of guidelines:

1. $1,000 to start an Emergency Fund
2. Pay off all debt using the Debt Snowball
3. 3 to 6 months of expenses in savings
4. Invest 15% of household income into Roth IRAs and pre-tax retirement
5. College funding for children
6. Pay off home early
7. Build wealth and give! Invest in mutual funds and real estate
posted by bensherman at 10:25 AM on May 11 [2 favorites]

Here's how we handle it:

In addition to our big emergency fund, which we save for genuinely huge emergencies and try like hell not to touch, my husband and I each contribute $100/month to what we call our "house account." There's usually about $500-700 in there at any given time (we haven't been able to much above that yet, since something always happens to deplete it), and we draw on it for unexpected small-scale expenses like those you described above. Since we started the account six months ago, we've used it twice for home repairs (a clogged pipe in the laundry room and glass replacement in a shattered window) and once when our car needed about $450 worth of repairs. Other reasons I could foresee us using it is if one of our pets was injured or ill, or my husband needed to make an emergency trip out east to his family.

I would probably pick an amount per head ($50/person/month? that would be about $1800 for the year) and start setting that aside. The $100/month we each put in is a pretty arbitrary number, but so far it seems to work for us. When we have a kid in a few years, we'll increase that amount to cover them as well.
posted by anderjen at 11:10 AM on May 11 [2 favorites]

I know someone who bought a house ~2 years ago, and recently had to come up with $30,000 basically overnight, due to a serious septic system failure that required them to hook into the city system, all at their own expense.
posted by nomisxid at 11:13 AM on May 11

I'm with Flunkie; these little $50 dings won't have a meaningful effect on the usefulness of your emergency fund to provide its safety power, if it's refilled immediately. In my case, $500 is set aside as "Random less-than-major emergency" money, for this kind of thing - wedding gifts, family-obligation road trips, and the like. I've never used more than a couple hundred at a time, and I just peel off $50 or $100 a month to refill it till it's topped off again.
posted by Tomorrowful at 11:49 AM on May 11

I (single, no car) budget about $100 a month for incidentals to cover unexpected gifts, visits to the doctor, repairs, etc. This is outside the money I put into savings.
posted by lunalaguna at 12:22 PM on May 11 [1 favorite]

Some of us refer to funds for the things you refer to as a "Freedom Fund." You can google it.
posted by jgirl at 12:32 PM on May 11

I keep a $1000 buffer in my checking account at all times to cover unexpected expenses. Any time the buffer dips below that, I budget to repay it the next month.

I also keep several hundred dollars in cash in my apartment. I was around during the Northeast blackout in 2003, so I like to have cash around in case of emergencies where ATMs and bank accounts are temporarily unavailable.
posted by decathecting at 3:58 PM on May 11

For our family of 4, we plan on spending about $500/mo on household stuff. This could mean clothes, shoes, minor repairs, presents, pool passes in the summertime, etc. Every month something different comes up. If we know we'll be spending $100 on a wedding gift that month, we cut back on other things that would come out of that fund. In the rare event we have extra, we generally spend it on something fun that we've been wanting. Last month a budget surplus coincided with amazon running a special on the Babylon 5 DVD box set, so it was like fate.
posted by selfmedicating at 6:24 PM on May 11

Each month, in addition to budgeting for groceries, mortgage, and utilities, I budget specifically for each of the following: child (includes diapers, activities), ATM cash, dining out (includes weekend coffees, bagels, any food not made at home, gifts (with a small kid, we're forever buying inexpensive gifts for other kids, household (I put about $200 monthly, covers all household needs like cleaning supplies, postage, small appliances for the home, basically is the sum of our Target/Bed-Bath bill), beer-wine; entertaining (because our food bills are duly larger when we host even relatively small events like family birthdays), clothing, automotive (I include only gas & put the rest in the annual budget, but used to budget some each month for oil changes). In the annual budget, I budget for car insurance, income tax, excise tax, oil heating, car repairs, charity, home decorating, and home improvement. We also have a "security fund" with some months' salary that has enough to double as an emergency fund. So you might want to add up the annual exenses, divide by 12, and add that to the monthy budget. I've been budgeting for these categories for the past 18 months and it avoids too many nasty surprises.
posted by dreamphone at 12:41 AM on May 12 [1 favorite]

This may be too simple (or flat-out wrong), but I heard a long time ago that when you add up everything to get to X, add 10% to X that can be used for various facets of X that happen to involve extra money, be they needs or wants.

Maybe it's been a self-fulfilling prophecy and/or my my not being good enough at budgeting to do it precisely, but it's so often happened that something or some things glommed up the 10%.

When it hasn't been used, it's been a little savings boost.
posted by ambient2 at 2:55 AM on May 12