Contingency Planning & Budgeting

Living within a budget is the first step toward financial stability. Expenses need to be covered by income, with something left over for savings. However, even the best-planned budgets can fail to account for unexpected events. This is where contingency planning and budgeting comes in. With a good contingency plan in place, unforeseen financial issues won't cause as much damage as they otherwise could.

Purpose

The purpose of a contingency plan and budget is to deal with unexpected financial problems that arise suddenly. Contingency budgets are different from long-term financial planning, such as the planning and saving you need for retirement. Contingency planning prepares for things such as job loss, reduction in income, a sharp reduction in the value of your home, unforeseen home repair expenses or unexpected medical expenses. When one of these situations arises, you'll be able to implement a prepared contingency budget, altering your spending and saving to account for your family's new financial picture.

Elements

Each household's contingency planning and budgeting is different. In general, a contingency plan should eliminate unnecessary expenses and reduce necessary ones. For example, you may be able to identify monthly bills that you could eliminate in an emergency, such as cable television, a cleaning or lawn care service, an extra phone line or an online movie subscription. Other expenses, such as automotive expenses, can be reduced if you cut down to a single car for your family or make plans to drive less as a means of saving on the cost of gas.

Planning

A contingency budget starts with your standard household budget. If you don't already have a monthly budget for your family, create one based on your current level of income and typical monthly expenses, including fixed costs such as rent or mortgage, and variable costs such as entertainment, food, gifts and recreation. Use the budget as a basis for identifying cuts needed for a contingency budget. Also consider extra sources of income in an emergency, such as property or investments you can afford to sell.

Implementation

A contingency plan and budget should be ready to implement right away. Consider checking and updating your contingency budget every few months to account for changes in your standard budget. Include phone numbers and other contact information for any of the changes you plan to make. For example, if eliminating your cable or satellite TV service is part of your emergency budget, list the phone number you'll call to cancel your service and note any termination fees that will apply to this change. An implementation "cheat sheet," kept with your emergency budget, will help you make the changes you need quickly and efficiently.