How to Budget for the New Year Without a Crystal Ball

There’s no way to know what tomorrow will bring, but traditional wisdom says to expect the unexpected.

How can you plan for something that you never saw coming?

The answer is both simple and complicated. It all boils down to financial responsibility, and having a plan in place to catch you if a bump in the road makes you stumble.

Most emergencies require cash. Some of them require a lot of it.

So the most important budget adjustment that you might make for 2014 is a dedicated, emergency savings account.

You won’t have a crystal ball, but with a generous amount of money set aside, you won’t need it.

Savings Should be Separate

Any number of savings goals might arguably be vital.

Retirement savings sets you up for the future. College savings means the kids won’t have to rely as much on financial aid.

Emergency savings is different; it can help you weather a financial disaster without taking from your other savings goals.

Most disasters become financial at some point.

Every family budget needs emergency savings separate from other accounts. If you don’t have it, the time to remedy that situation is now.

When savings is lumped into one pot, you can’t measure progress toward goals, and it’s too tempting to pull from the pot for other expenses.

Keeping each goal separate lets you know whether you’re on track, and gives you the opportunity to make adjustments as needed.

How Much Emergency Savings is Necessary

Without knowing what might happen in the next year, all you can do is hope for the best while preparing for the worst. It’s the preparing part that’s so important.

A job loss or large medical bill could be financially devastating if there’s no emergency fund in place to take up the slack.

With at least 6 months salary set aside, a surprising expense won’t leave you with unpaid bills, scraping to buy groceries, and can help life continue on reasonably unscathed.

But 6 months is a lot of money for most people. If you normally bring home $5,000 a month, you need $30,000 safely tucked away from every other savings account you’ve got.

It’s important for at least part of your emergency savings to remain easy access, too. Some emergencies require money now — they can’t wait for cash to be liquidated.

Finding the Money to Route There

Many families don’t have a surplus of income.

For some, most of it is spent on expenses with very little left over. For others, general and retirement savings, and possibly investments, claim what remains after the monthly responsibilities are handled.

If all, or most, of your income is already spoken for, you probably wonder where to find money to direct into an emergency fund.

Wells Fargo offers a tip. Track all of your spending for one or two months.

Mint.com software is a free great tool for that, since it shows every expense and payment made.

At the end of your tracking period, take some time to examine where your money goes and find areas to cut back.

With fixed expenses, such as a mortgage, you might be set in a pattern that you can’t change without refinancing. But variable and discretionary expenses have more wiggle room.

Variables include bills such as cell phone plans, which you can sometimes change.

Discretionary expenses, such as eating out, are totally within your control. You can cut them out to whatever degree you like.

And wherever you cut back, there lies your money for the emergency fund.

It Won’t Happen Overnight

Six months salary in the bank is a tremendous goal, which is all the more reason to start as soon as you can.

But life-altering emergencies don’t happen every day, or even every year. So for many people, there’s time to build up to what you might need.

To get you started, think of a smaller, interim goal that you can reach in less time.

$500 to $1,000 might not be enough for some of life’s bigger problems, but it can buy any number of things that you might ordinarily put on credit, such as an unexpected flight.

Once that’s in place, you have a foundation to build on.

Emergencies are, by nature, unexpected — more often than not, you never see them coming. A job loss can set you back, and so can a car that goes kaput.

With emergency savings on hand, these trials don’t have to lead to late and missed bill payments. It helps prevent one incident from disrupting everything else in your life.

Mint.com has budgeting down to a science. There are so many features, all of them designed to help you create and work toward financial goals.

Once you set up your account, then you can get down to the business of creating a budget that includes your usual responsibilities, and a safety net for unexpected ones.

Sign up for your free account today. It’s the next best thing to a crystal ball.

Mary Hiers is a personal finance writer who helps people earn more and spend less.