Doesn’t it seem like there are always expenses you never expected? Today the ignition system on my car broke, last week my girlfriend’s car needed a new battery ($75) and yesterday one of my dogs was violently sick and had to go to the vet ($260). Some older examples for me have been spur of the moment flights, a speeding ticket (2 days after my birthday, no less) and my car breaking down. While it is frustrating, these are things that have to get fixed but weren’t necessarily expected.

So how do you financially plan for the unexpected? When I pay my bills, two Fridays out of every month, I set aside $250 ($500 a month) in a separate bank savings account. The reason for this is purely psychological. If I don’t see it in my main account, I think I spent it. Therefore if I don’t use the money I can keep it there as next month’s cushion or move the money back. How did I come up with $500? It is not based on income or anything like that. I just happened to notice that when something unexpected comes my way it typically costs me $250. Therefore my number is just 2 * $250 =$500. Everyone will have to optimize based on their own personal financial experience but that’s how I do it.

This whole exercise is psychological but so is most of personal finance and investing. When an expense comes out of the blue, I know I have fund set aside and it puts me at peace. If I am expecting to pay $0 for a sick dog but really have to pay $260, I am going to be upset and in a bad mood. If I plan ahead however, and set aside $500, I have only $260 of unknown expenses. Rather than feeling stressed and struggling to find extra cash, I am in a great mood. Is anything materially different? No, but expecting the unexpected and preparing for it put me in a better mood and that’s what life is all about. Hopefully I will still be in a better mood after I find out my ignition repair bill!