Contingency Budget: What Is It and How Much Do You Need?

When an unexpected and costly event occurs, whether it’s an urgent need for a car repair or a tuition increase, managing your financial situation is the last thing you want to think about. That’s why it’s a good rule of thumb to have a fund that was created in advance. Without one you may find yourself in a financial bind when it comes time to cover the cost of the expense.

A contingency budget is an important tool to help families plan for the unexpected. Some of the most common reasons folks dip into their savings include:

• Health emergency
• Auto maintenance and repairs
• Insurance
• Job loss
• Other financial emergency

What is a Contingency Budget?

According to a recent survey, half of Americans say they have less than three months’ worth of emergency savings. About the same amount would struggle to cover an unforeseen $500 expense. Contingency is just a fancy way of describing something that could happen in the future but can’t be predicted with certainty. These urgent expenses could be anything from car repairs to unexpected bills to family emergencies. The budget includes both an estimate of how much money to set aside, as well as a plan that details how you expect to finance any range of future needs.

Benefits of a Contingency Budget

Budgeting for the unexpected is a great way to save money and have a little extra cash when you need it most. It isn’t necessarily a long-term solution to your financial problems, but rather a short-term solution to something that could come up in the road ahead. Because it will incorporate funds to cover unexpected expenses, the budget allows you to be flexible when it comes to spending money. Some people also view their plan as a way to save money on regular expenses, such as eating out, entertainment, and other daily expenses.

If budgeting sounds like a hassle to you, keep in mind that the purpose is to avoid future headaches, not keep your family from having a little fun now and then. The goal of a financial contingency budget is to keep your finances on track so that you can avoid financial emergencies in the first place. This plan should help you save money, avoid debt, and keep your finances in order when an unexpected expense comes up. Because the planning aspect helps people become more aware of their financial situation, it can also help them avoid overspending and ensure that they can cover basic, day-to-day needs.

How Much Money Should You Set Aside for Your Contingency Budget?

Your budgeting plan requires a little foresight – a.k.a., imagination. How much money would you need in an emergency fund meant to cover basic expenses such as rent, food and gas for a month? How about three months? A realistic assessment of your situation will give you a reasonable idea of how far the money will go. Next, plan backwards. In order to have a fund of $500 in two years, you’ll need to set aside $20 and change each month until then.

Taking this approach, you may decide your family could realistically need $1,000 in the near future to cover a medical expense or pricey car repair. Now you know to set aside $40 instead of $20 each month. You and the other members of your household can discuss how to pool your resources so that one person isn’t footing the whole bill, so to speak.

Stay on Top of Expenses Using Smart Financial Services

Whether to create a contingency fund or simply to get your personal finances in order, it’s important to use all the smart tools at your disposal. Neighborhood Currency Exchanges (CCEAs) throughout the Midwest take the hard work and confusion out of many financial tasks. Check out our full list of services at your disposal that you can use to help you set up your personal finances.

Who knows. With a little luck, you may not need that extra cushion of cash. If things change, your family will be better positioned to take that dream vacation instead.

Your nearby CCEA will have loads of information and services to help you make fiscally wise choices for the whole family this summer. Stop by your nearest location today and take advantage of our many convenient and reliable services.