Most Unexpected Expenses…Aren’t

“Unexpected Expenses” is a topic that frequently comes up in my classes and when talking with others about finances. This is in the context of a discussion around spending less than you make, saving and investing the rest, and letting compound interest work its magic. Pretty much invariably, several folks will say something similar to the following, “Yes, I can see how that math works, but what about when unexpected expenses come up?” So let’s explore that a bit.

Important Note: I am in no way trying to minimize the impact of these expenses or how stressful it can be when you don’t have the money to cover them. Nor am I speaking to folks who are earning poverty-level wages. The context of our discussions is that we are talking about saving and investing for people making at least the median household income in the United States ($70,784 as of 2021). Just about everyone in my class who has a partner is making more than that in their household, and the single folks may (or may not) be making less, but obviously have less expenses. So I’m exploring this idea in that context.

So let’s take a look at some of the “unexpected expenses” that frequently get mentioned.

• Car Maintenance and Repair: If you own a car, you know you are going to have on-going maintenance costs, occasional repair costs, and eventually will need to replace it.
• Home Maintenance and Repair: If you own a home, you know you are going to have on-going maintenance costs and occasional repair costs (the water heater is going to break, the furnace/ac is going to need to be replaced, as will your appliances), and you may eventually decide to move to a new, more expensive house.
• Health Care Costs: If you are alive, you know you are going to have at least some on-going out-of-pocket health care costs and occasionally have a larger bill for something more involved. And, if you have children, you know this is going to happen more frequently (broken bones, braces, etc.)
• Children: There is no doubt that children are expensive, including daycare costs if that applies to you (but there are tax breaks to help with that). You know children are expensive and you (should) know those expenses are coming.

So here’s my (apparently controversial to some folks) take: these are not unexpected expenses. All of these expenses are (or at least should be) expected. It’s not a question of if, it’s just that you don’t know when they are going to happen.(The expense isn’t unexpected, just the timing.)  So you should be planning for these expenses in advance and, when they happen, they still won’t be fun, but you’ll be prepared. This is the reason why it’s suggested you live below your means and have some savings¹ built up (and then, once you have that savings, any additional extra goes into investments).

But for many folks, if there is money left over at the end of the month, that’s money that they feel free to spend. And then when those expected expenses arise (again, we may not know when, but we know they are coming), they view them as unexpected and something they have trouble paying for. It’s this mindset that I try to (gently) address in my classes and conversations. If you’re paying your fixed bills each month and then spending the rest on other things because you have “money left over,” then you aren’t being rational about the expenses that you know are coming. (Again, see the note at the beginning that this is not speaking to those who are barely making enough to survive.) If, however, you think about the future just a little bit, then you set aside the appropriate level of savings to handle these expected expenses and then invest anything above that. So, yes, when these expected expenses do hit, perhaps you then need to redirect that extra from investments back into savings to build it back up. But that’s temporary, and once your savings is built back up, you return to investing the extra.

Some folks will disagree with this approach and argue that it’s important to also live in the moment. I don’t disagree with that, and agree that if that aligns with their values and goals then that is what they should do. But they also need to be realistic about the consequences of that and not lament that they don’t have the means to deal with these expected expenses. They do (or could), they’ve just chosen differently. They need to find a balance between living the life they want to live now and the life they’d like to live in the future.

So what’s the point? (“Yeah, Karl, what is the point?”). I’m hoping this might encourage some people to reexamine their mindset around this issue. Everyone (above poverty level, and certainly those making better than the median) should have enough built up in savings to handle these expected expenses (whenever they end up happening), and then take any additional they have available and invest it to start that virtuous cycle of compound interest (for use by their future selves).  If you think there’s just no way it’s possible you can do this, then perhaps you should also take some time and reflect on if you are actually living beyond your means.

¹Some people refer to this as “emergency savings” but, no surprise, I don’t like that term. These aren’t emergencies, these are things that are expected to happen. This is why we have savings. While true emergencies do happen, those are why we have insurance.

• We have homeowners insurance in case something catastrophic happens to our house (for example, a tornado hit my house last week – that was unexpected). But we should be prepared to pay the normal home maintenance and repair costs ourselves.

• We have health insurance to help prevent catastrophic costs (there’s a yearly out-of-pocket limit and no lifetime maximum), not to pay for the expected out-of-pocket costs.
• We have life insurance if we have dependents who depend on our income in case a tragedy happens, in order to help them until they become old enough to earn enough to be independent, not to pay for daycare, sports and activities.
• And car insurance, and disability insurance, and…