Unexpected expenses can cause financial anxiety. This is true for me, even though I have a good salary and a solid emergency buffer. One way in which I reduce my financial anxiety is by predicting expenses based on the expected lifetime of a purchase.
Some items have a limited lifetime (e.g. 4–5 years) and have a non-trivial cost (e.g. €1500). A non-trivial cost is a cost that, if it were to suddenly show up, would stir up my budget enough to cause stress. For me, these items fit primarily into three categories:1 (1 This categorization isn’t all-encompassing: some items with non-trivial cost and limited lifetime don’t fit in properly, e.g. my glasses.)
This explicitly excludes items with non-trivial cost that have a long (expected) lifetime. For example, this does this not include my expensive (but gorgeous) kitchen table, which hopefully will last forever.
Starting out with this technique requires some initial setup. Once that’s done, the technique is easy to apply on a monthly basis.
Make a list of all items with limited lifetime and non-trivial cost. You can use the categorization above as a guideline.
For each item, roughly estimate its remaining expected lifetime, and the cost to replace it. For example: I bought my MacBook Pro in late 2017 and expect its lifetime to be 5 years. At the time of writing (early 2021), the expected remaining lifetime is roughly 20 months, and replacing it would cost roughly €1500.
Each month, budget the amount of money needed to cover the replacement cost in the expected lifetime. For example, the €1500 for replacing my MacBook Pro over the remaining 20 months of its lifetime comes down to €75/month.
For each future purchase with limited lifetime and non-trivial cost, do this budgeting calculation right when you make the purchase. For example, if I were to replace my MacBook Pro right now (assuming the replacement has the same cost of €1500 and the same expected lifetime of 5 years), I’d immediately start budgeting €1500 spread over 5 years, which comes down to €25/month.2 (2 Budgeting software exists to make this easier! I use You Need A Budget, which works nicely with this approach. I’m also keeping my eye on Actual.)
It is safe to use the warranty period as the lifetime, but this can be overly pessimistic. For example, my 2017 MacBook Pro is out of warranty, but I expect to keep on using it for at least another year.
In the end, it comes down to how much risk (uncertainty) you’re willing to take on.
I am able to deal with unanticipated expenses in a straightforward, no-anxiety way. Ideally, I only replace the item once I have all the money for replacement saved up, but even if I need to replace it before its expected lifetime ends, I will at least have a helpful part of the money saved up.
I see which items have extended past their expected lifetime. Because these items have been fully-funded, I can replace them with no financial impact — if I need or want to.
It makes me prefer purchasing long-lasting items over short-lasting ones, as short-lasting items will have a potentially higher monthly cost (for budgeting) associated with them.
It looks rather gloomy to immediately start budgeting for replacing an expensive item, right after purchasing it.