Unexpected expenses

[TromboneAl]

Quote:

I include an unexpected expense line in my budget but nowhere near this much. I wonder how common this is?

I think you had an unusually bad year.

[cinman2000]

I know this is an old post, but wanted to comment on its value. This is probably the most uncertain area of my plan right now. So much that I am solving for this number and using that to measure the level of risk to pulling the trigger on RE. I currently can afford $3,000 per year which is just over 1% of the value of our house. I also have in the plan $200/month for smaller housing issues, car replacements every 5 years, 2 weddings for daughters (1 each) :-), and one RV purchase. Getting so close to pulling the trigger!! Any other approaches?

[arky]

Quote:

Originally Posted by cinman2000 I know this is an old post, but wanted to comment on its value. This is probably the most uncertain area of my plan right now. So much that I am solving for this number and using that to measure the level of risk to pulling the trigger on RE. I currently can afford $3,000 per year which is just over 1% of the value of our house. I also have in the plan $200/month for smaller housing issues, car replacements every 5 years, 2 weddings for daughters (1 each) :-), and one RV purchase. Getting so close to pulling the trigger!! Any other approaches?

Strictly speaking, I don't have a budget. I just go about my business and spend as I go. Five years into retirement, my annual spend rate is remarkably consistent. So far, the approach I have taken is to have ~ 20K in a savings account that is tied to my checking account (transfers take seconds online). I use it to smooth out my cash flow and plan to use it for any "big" expenditures that arise (so far, nothing really big).

[FUEGO]

I think it makes lots of sense to expect the unexpected. Something will happen every year, but everything bad isn't likely to happen all in one year. Pick a number to cover these expected unexpected expenses, plan for it, and hope you don't exceed it too often.

Our expenses have been very consistent the last 3 years since I started tracking them in great detail (every dollar spent). Having a baby, new appliance/toy purchases, major car repairs/maintenance, etc all averaged out to about the same each year.

As for unexpected house expenses - plan on replacing the roof, painting inside and out, carpeting/flooring, appliance replacement, HVAC replacement/major repair, replace hot water heater, major plumbing work. These things will be recurring expenses - some every 5-10 years, some 15-20 years apart, but you can estimate pretty well on average. I figured out on our house, these recurring replacement costs will run about 1% of the house value on average each year. That is on top of more routine housing related operations and maintenance expenses.

[ERhoosier]

+1 on keeping a "rainy day fund" for unexpected expenses. Housing is one issue, but medical bills must also be considered. Most seem to have little idea what their "out of pocket maximum" med expenses might be should they (or family member) suffer serious illness/injury.

[panhead]

I have an R&R line item in my budget of $250/month. When I retire, I will stuff this money into a safe account and let it build for house/auto repair and replacement items. I also have a line item for "fun" which I hope to be pretty substantial when I retire. My thinking is, if something big happens, I can also use this money, since it's discretionary. If the monthly amount doesn't cover the full bill, there is always a HELOC (taken out before retiring, of course) or credit card in worst case scenario to float yourself a loan. I mean, if I have a multi-thousand dollar medical procedure, I'm probably going to want to hang around home and spend money from my "booze" line item as opposed to flying to tahiti or what not.
Hmph, with that being said, is it 5 o'clock yet?

[Katsmeow]

Quote:

Originally Posted by cinman2000 I know this is an old post, but wanted to comment on its value. This is probably the most uncertain area of my plan right now. So much that I am solving for this number and using that to measure the level of risk to pulling the trigger on RE. I currently can afford $3,000 per year which is just over 1% of the value of our house. I also have in the plan $200/month for smaller housing issues, car replacements every 5 years, 2 weddings for daughters (1 each) :-), and one RV purchase. Getting so close to pulling the trigger!! Any other approaches?

I used YNAB for budgeting and this issue gets discussed a lot on the YNAB forums.

You Need A Budget

You can conceive of irregular expenses of several different types:

1. Those that are irregular in terms of not being monthly expenses but fixed or nearly fixed in amount - Ex: HOA fee due each January. Those are easy to budget for.

2. Those that are variable in amount but occur regularly throughout the year - Ex: Groceries or auto fuel. Determine an average amount and budget it each month, carrying over unused amounts in low months for the occasional high month.

3. Expenses that are variable in amount and occur irregularly through out the year, but tend to be a certain amount over the course of the year. An example for me would be veterinary expenses. Another example might be "regular" home maintenance or auto maintenance.

4. Expenses that will surely happen at some point, but are very large and may only occur once in several years (or even many years). Example: New car, new roof. Best handled through a separate sinking fund category that is saved up over the course of years.

5. Expenses that may or may not happen or that will happen but have a chance to be much higher than anticipated. You might go through the entire year with none of these, but might have more than one. It is extremely unlikely you will have all of them all at once. Examples that happened to me: Hurricane caused tree clean up that cost several thousand collars. The year that auto repair costs were 6 times what I typically spend in a year. The year that home repair expenses were several times the usual amounts mostly due a non-typical well expense.

If I tried to assume in each category where this could happen that it would happen in every year I would be saving way too much on each one: Auto, home, veterinary, etc. What I do instead is have an Irregular expense category where I park $X in it at the start of the year. I still allocate $X a year for home repair for example based upon "typical" expenditures. And I allocate $Y for auto repair based upon "typical" expenditures. However, if there is an expense that goes way beyond that I typically expect then I pull it from the irregular expense category (and then work to build that category back up). Since I started doing this it has worked well for me, since you don't usually have all those freak events happen in one year.

[Alex in Virginia]

Quote:

Originally Posted by FinallyRetired I'm beginning to think I should expect huge unexpected expenses. Just over the last 12 months I've had the following: New heat pump compressor $1200 Plumbing leak damage above insurance reimbursement $5000 Share of funeral expenses for close relative $2500 Window glass repair $750 Replacement microwave $1080 Replacement water heater $380 Fallen tree removal $250 Total $11,160 I include an unexpected expense line in my budget but nowhere near this much. I wonder how common this is?

I am a big believer in having a home warranty policy. I pay around $500 per year and then have a $100 deductible per repair incident. If I had had those same expenses you had, I would have paid a total of $300 for the heat pump compressor, window glass and water heater (instead of your $2380).

I'm a little surprised no one has brought this up yet in the thread. I have held home owner warranty policies since 2000, and every year I have at the very least broken even. I've had biggies, too -- major furnace repair, well pump replacement, water line do-overs, etc.

An additional advantage is that when I have a problem, I call the service request line and the company provides me with a qualified repair outfit to call (which the warranty company stands behind).

Alex in Virginia

[kyounge1956]

Quote:

Originally Posted by Alex in Virginia I am a big believer in having a home warranty policy. I pay around $500 per year and then have a $100 deductible per repair incident. If I had had those same expenses you had, I would have paid a total of $300 for the heat pump compressor, window glass and water heater (instead of your $2380). I'm a little surprised no one has brought this up yet in the thread. I have held home owner warranty policies since 2000, and every year I have at the very least broken even. I've had biggies, too -- major furnace repair, well pump replacement, water line do-overs, etc. An additional advantage is that when I have a problem, I call the service request line and the company provides me with a qualified repair outfit to call (which the warranty company stands behind). Alex in Virginia

Where does one get such a policy? Is it an add-on to your ordinary homeowner's insurance? Are home warranties available for existing houses or only new construction? How do the premiums compare to the various ways of handling unexpected expenses already mentioned in the thread, such as setting aside a percentage of house value every year?

[REWahoo]

They are stand alone policies and you can buy one for an existing home. Check out the premiums and see if you think it might be a bargain - I don't but others obviously do or they wouldn't still be in business. Home Warranty Company | Home Protection Plan | AHS

[LRDave]

Quote:

Originally Posted by Alex in Virginia I am a big believer in having a home warranty policy. I pay around $500 per year and then have a $100 deductible per repair incident. If I had had those same expenses you had, I would have paid a total of $300 for the heat pump compressor, window glass and water heater (instead of your $2380). I'm a little surprised no one has brought this up yet in the thread. I have held home owner warranty policies since 2000, and every year I have at the very least broken even. I've had biggies, too -- major furnace repair, well pump replacement, water line do-overs, etc. An additional advantage is that when I have a problem, I call the service request line and the company provides me with a qualified repair outfit to call (which the warranty company stands behind). Alex in Virginia

Each to his/her own, but Clark Howard (whose name and rep should resonate with the "frugal" around here...) does not think much of HOWs.

Home warranties not worth the paper they're written on | www.clarkhoward.com

[H2ODude]

Maybe there is an individual out there for whom buying an insurance policy for home repairs has worked out. That's like saying there are people who win the lottery. If those who run lotteries (insurance companies) didn't win, they wouldn't be in business. Which is to say that in the long run you will lose buying such policies. Like buying an extended warranty on that appliance. As Dad always said, don't buy insurance for things you can afford to cover yourself.

[dmdunca44]

Quote:

Originally Posted by Katsmeow I used YNAB for budgeting and this issue gets discussed a lot on the YNAB forums. You Need A Budget You can conceive of irregular expenses of several different types: 1. Those that are irregular in terms of not being monthly expenses but fixed or nearly fixed in amount - Ex: HOA fee due each January. Those are easy to budget for. 2. Those that are variable in amount but occur regularly throughout the year - Ex: Groceries or auto fuel. Determine an average amount and budget it each month, carrying over unused amounts in low months for the occasional high month. 3. Expenses that are variable in amount and occur irregularly through out the year, but tend to be a certain amount over the course of the year. An example for me would be veterinary expenses. Another example might be "regular" home maintenance or auto maintenance. 4. Expenses that will surely happen at some point, but are very large and may only occur once in several years (or even many years). Example: New car, new roof. Best handled through a separate sinking fund category that is saved up over the course of years. 5. Expenses that may or may not happen or that will happen but have a chance to be much higher than anticipated. You might go through the entire year with none of these, but might have more than one. It is extremely unlikely you will have all of them all at once. Examples that happened to me: Hurricane caused tree clean up that cost several thousand collars. The year that auto repair costs were 6 times what I typically spend in a year. The year that home repair expenses were several times the usual amounts mostly due a non-typical well expense. If I tried to assume in each category where this could happen that it would happen in every year I would be saving way too much on each one: Auto, home, veterinary, etc. What I do instead is have an Irregular expense category where I park $X in it at the start of the year. I still allocate $X a year for home repair for example based upon "typical" expenditures. And I allocate $Y for auto repair based upon "typical" expenditures. However, if there is an expense that goes way beyond that I typically expect then I pull it from the irregular expense category (and then work to build that category back up). Since I started doing this it has worked well for me, since you don't usually have all those freak events happen in one year.

+1
I also use YNAB. I have four specific Rainy Day funds: Home maintenance and repair, Emergency Vet expenses, OOP Health Care expenses and Vehicle maintenance and repair. Unexpected expenses pretty much fall under these categories (for us, anyway) and even if I don't have enough in one fund to cover it, I have have the other funds to "borrow" from....

[FUEGO]

Re home warranties - sure they sound great, but a friend (who is very savvy about money and home repairs) did not have a great experience with his home warranty. Price was about the same, but repairs were substandard, and service calls had a $65 or so co-pay to get someone out. Around here, you probably wouldn't pay more than $80-85 to get an appliance repairman out anyway. Then the repairman dispatched said he couldn't fix what needed fixing because of some BS excuse. As a result the problem didn't get fixed (something to do with the dishwasher) because of a technicality in the policy. So you get what you pay for, and nothing more. Similar results with the HVAC repair that they wouldn't fix because of a technicality.

Like others said, how do you think this insurance company stays in business? It isn't from paying out more than they take in on premiums.

To each their own of course, and I am sure an adequately motivated person could argue/litigate the heck out of each point of the policy and maybe come out with a slight advantage over the annual premium (on average). Most have more fun/pressing things to attend to.

[obgyn65]

I don't have an unexpected expense line in my ER budget.

Quote:

Originally Posted by FinallyRetired I include an unexpected expense line in my budget but nowhere near this much. I wonder how common this is?

[cinman2000]

Quote:

Originally Posted by Katsmeow 5. Expenses that may or may not happen or that will happen but have a chance to be much higher than anticipated. You might go through the entire year with none of these, but might have more than one. It is extremely unlikely you will have all of them all at once. Examples that happened to me: Hurricane caused tree clean up that cost several thousand collars. The year that auto repair costs were 6 times what I typically spend in a year. The year that home repair expenses were several times the usual amounts mostly due a non-typical well expense.

So I went back 10 years in Quicken and sorted by amount to see what my big ticket items were. Some of these were discretionary and others were home repair related. I came up with about $5,700 per year and put that in my plan. I know some years will be more and some less, but I'm pretty comfortable now with this as a conservative plan.

[Meadbh]

I recently developed a retirement budget but I did not add a category for unexpected expenses. My reasoning was that I will be modifying the budget based on the initial months/year anyway, so the second iteration will be more accurate. I also have an emergency fund and a HELOC for such contingencies.

[Alex in Virginia]

Quote:

Originally Posted by H2ODude Maybe there is an individual out there for whom buying an insurance policy for home repairs has worked out. That's like saying there are people who win the lottery. If those who run lotteries (insurance companies) didn't win, they wouldn't be in business. Which is to say that in the long run you will lose buying such policies. Like buying an extended warranty on that appliance. As Dad always said, don't buy insurance for things you can afford to cover yourself.

That's me! I've had a policy for 10 years and never regretted it. The home warranty company must be making all its money on the other guy.

Alex in Virginia

[jazz4cash]

Quote:

Originally Posted by kyounge1956 Where does one get such a policy? Is it an add-on to your ordinary homeowner's insurance? Are home warranties available for existing houses or only new construction? How do the premiums compare to the various ways of handling unexpected expenses already mentioned in the thread, such as setting aside a percentage of house value every year?

My mortgage is with GMAC and they occaisionally send me a an offer for a product called Total Protect. I always felt the offer was too good to be true ($40-50/mo added to my mortgage payment) and not really necessary since we bought the house new. I just can't see how they could provide this benefit without knowing the condition of the appliances in our home. Now that the house is 12 yrs old, it makes more sense. I checked around and found two people I trust that had good experiences with the same company...plus thier latest offer included 4 HVAC checkups per year @ no charge. I applied for the warranty in July. Our furnace died in November and that was when I realized they never billed me for the warranty so we were out of luck. I think I will look into signing up for the program and this time I will verify my application gets filed!

[Alex in Virginia]

Quote:

Originally Posted by Alex in Virginia That's me! I've had a policy for 10 years and never regretted it. The home warranty company must be making all its money on the other guy.

And here I "score" again on my home warranty policy! The cold water line to my kitchen just started leaking/rupturing. But no worries here! Called the home warranty company and the plumber will be here tomorrow. My maximum liability? A $100 "co-pay".

I am telling you, these policies work (for me, anyway).

Alex in Virginia