When you plan for an emergency, it is no longer an emergency.

One of the basic tenets of Bottom Line Personal Finance is that you can plan for (almost) anything. Even emergencies. 

Before I started learning about finance and applying what I was learning to my life, I had a lot of emergencies. Oil changes, routine doctor appointments, holidays, annual vet visits. These were all emergencies. Looking back, what was feeling like an emergency, rarely was an actual emergency. These things, like the vet visits and oil changes, felt unexpected to me and I wasn’t prepared for them, making them difficult to handle both financially and emotionally, like many actual emergencies. 

There’s interesting research by Abbigail Sussman, an associate professor at The University of Chicago’s Booth School of Business, into the tendency to plan poorly for unanticipated things that feel unexpected but should be expected. Sussman’s research finds that people often underestimate the cost and occurrence of events which leads to predictable and avoidable mistakes. (You can listen to more of Sussman’s research on the Choiceology podcast, linked here).

We have expenses that we mentally construe as being one-time only, and because of that, we under value their impact. When these expenses happen again and again (which they do), they are significant.  

A particularly apt example, especially coming from the last several months of holidays, involves how we mentally account for items we consider part of the food budget. In October, when we buy Halloween candy and we attribute that cost to our grocery budget, we notice that our grocery spending is higher than normal. We write it off as a one-time event – Halloween. But then, in November, we have Thanksgiving, and again, we spend more on groceries than was planned for in our budget. In December… you get the gist. If we don’t account for these expenses by either increasing our grocery budget year-round, or making a budget category for these expenses, we underestimate our spending. 

Despite these events feeling unexpected or unanticipated, we can work to plan for them. If we account for all the predictable events and items in our budget, we are prepared for them when they arrive, leaving room for things that are true emergencies. 

In contract law, emergency events are called force majeure, or acts of God. These are events that no one can expect because they are a result of nature. In contracts, there is often a provision that allows the parties to be excused from an obligation because of a force majeure event. These events often are defined to include inclement weather, strikes, government shutdowns, and now, pandemics. 

There may be force-majeure-like events that disrupt our expectations in our budget. These events in our personal lives might look like fires, floods, unpredictable health events or home disasters, and job losses. These do not include oil changes, routine doctor appointments, holidays, or annual vet visits. Being aware of the difference and planning for what you can, diminishes your exposure to emergencies. To the extent we can plan for these force-majeure­-like events, we do so in two ways. First, we do our best to plan for the things that we can anticipate. Once we have created a spending plan that captures all the recurring expenses (a Bottom Line budget), we know how much money we need for a month of living. Second, we create an emergency fund which we leave untouched except for emergencies.   It is recommended that you have no less than 3-6 months of your Bottom Line saved for these events.

Are there events in your life that have felt unexpected but that you could have planned for?