One of my favorite board games is Agricola, a complex worker-placement euro game in which you have to build a farm starting with two people and a plot of land. You till fields, build fences, plant crops, raise livestock, and eventually grow to a large estate. I’m sure it’s much more fun on a board than in real life. At the end of the game, the player with the largest and most diverse farm wins. But there’s this one other factor that crops up throughout the course of the game. Every so often you need to have enough food on hand to feed your family. And, without proper planning, it’s really difficult to do. Many novice players either miss this or forget about it, and when it comes up, it’s devastating. They are surprised by something that is not really surprising. Or, at least it’s unsurprising once you’ve had it happen to you once.
A much more succinct example would be this: Don’t be surprised when I, as your Dungeon Master, drop a fireball on your closely clustered party. You should have seen it coming.
In personal finance, there are a few ways to handle what could be (or should be) unsurprising expenses. It all comes down to planning. We budget for short-term expenses, save for long-term expenses, and insure against potential expenses.
Some expenses are certain to be incurred and are possible to predict. They WILL happen, and it’s foolish to be surprised when they come around. Some expenses that fit in this category are annual (like property taxes or your termite plan) and others are monthly (mortgage/rent, utilities, auto insurance, etc). Instead of being surprised when they happen, plan for them and set aside money from each paycheck for them. This process is called budgeting. That has a generally negative connotation, but it’s really just having enough food to feed your family when that phase of the game takes place.
Other expenses are likely to be incurred, and less possible to predict. This would be expenses like your car breaking down, your water heater going out, a speeding ticket, a storm taking a tree down, yada yada yada. Each of these events can cause serious financial stress, in addition to the regular stress that comes along with them. I’ve been on the side of the road waiting for a tow truck that I couldn’t afford, but couldn’t afford not to have either. It’s not a pleasant experience. The way to handle that is to set aside money into a separate account and never touching it. This is called an emergency fund. Several personal finance gurus (Ramsey and Howard Dayton among others) recommend getting a $1k emergency fund saved up as soon as you can, and more as it becomes possible. This will cover you in case of some of these semi-major emergencies. Saving money and keeping it separate from your checking account is just spreading your party out so the Dungeon Master can’t TPK you with a single fireball.
Lastly, there are catastrophic expenses that may or may not be incurred. Your house may burn down. Your car may be involved in a major collision. Your spouse (or you, or both) may die. These are usually too large of an expense to be covered personally. Unless you are vastly wealthy and can self-insure against those expenses, you should purchase insurance. Auto insurance is mandated, as is homeowners if you hold a mortgage. Life insurance is completely optional, but it’s a responsible purchase if you have dependents. For this, I’d recommend a term-life policy with a term that covers the needs of your family until you can either self-insure and/or your dependents are moved out, through college, and on their own. Some people use whole-life insurance as an investment vehicle. There are better ways to invest, for sure.
Of course, there are surprising things that will surprise you. Like, Costco is STILL out of toilet paper. What on Earth is going on? And how can we possibly be pregnant after having unprotected sex?! (We're not actually pregnant, but "surprise" kids always crack me up. We all know how this works.)
I tried coming up with a boardgame equivalent to insurance. No luck. Any ideas? Leave them in the comments. Thanks for reading!
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