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Liz Pulliam Weston

The Basics

How to plan your 'emergencies'

Just about everyone is surprised when the roof leaks, a tooth aches or a car needs major repairs. But there's a way to pay those big bills a little at a time.

By Liz Pulliam Weston
MSN Money

In a 2007 Pew Research Center poll, one-third of respondents reported an unexpected expense in the previous year that seriously set them back financially. Of those who reported such surprise bills, the most often cited big expenses were:

  • Medical (34%).

  • Cars (24%).

  • Housing (20%).

Here's the thing, though: Medical bills, car expenses and home costs aren't really unexpected -- at least they shouldn't be. If you have a body, a car or a home, sooner or later it's going to cost you.

Predicting exactly how much you'll have to pay can, of course, be tricky. And forcing yourself to sock that much away can be even trickier. But you can reduce the odds of a budget-busting expense with smart planning -- and fortunately, online banking technology can make this much, much easier.

Here's how: Treat your big unexpected bills like the ones that come every month.

Make it automatic

Open a savings account online. Unlike traditional banks, which typically charge a monthly fee for each account unless you maintain a certain balance, online banks usually don't have fees or minimum balances.

You can set up a variety of subaccounts earmarked for different goals and purposes. You can have separate accounts for medical, car and home savings, along with accounts for vacations, holidays, a home down payment, or anything else you want. (J.D. Roth at partner blog Get Rich Slowly showed step by step how to set up separate subaccounts at his online bank, ING Direct.)

You also can set up automatic transfers to sweep money into each of your subaccounts on a monthly, biweekly or weekly basis.

A quarter of ING Direct's customers take advantage of those conveniences, bank spokeswoman Cathy MacFarlane says. Twenty-five percent have multiple savings accounts, and 26% have set up automatic transfers.

Why separate accounts instead of one all-purpose emergency fund? The one-big-pot approach works fine for some, but many of us have a squishy idea of what constitutes an emergency. It's too easy to raid the pot and then discover you don't have enough cash to cover the big bills when they arrive. (Read "Save your emergency fund for the real thing" for more on this.)

Separate accounts also give us that instant gratification so important for staying motivated to save, said financial planner Robert Pagliarini, the author of "The Six-Day Financial Makeover." Setting up these smaller pots and making regular deposits give us tangible proof that we're making progress toward our goals.

"When you rip open your account statements or view them online, you'll know that every dollar in each account is earmarked," Pagliarini said. "You'll know exactly how much you've saved and how much more you need to save."

Here are three subaccounts most people need to set up today:

Car costs

Even new cars likely will need thousands of dollars of maintenance and repairs in the first few years of ownership. Older cars are usually even costlier. Rather than pretend big car bills are unexpected, start setting aside money to cover them so you don't wind up charging these inevitable costs.

How much do you need? If your car is 5 years old or less, check out Edmunds.com's "True Cost to Own" feature, which tracks how much recent models are likely to set you back in maintenance, repairs and other costs.

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Why cash is important
Banks are so eager to win and keep depositors, MSN Money's Jim Jubak says, that if you have a little green right now you’ll be able to negotiate a better rate on a CD or money market account.
A new Honda Civic, on average, will cost a Los Angeles resident $3,499 in maintenance and $773 in repairs over the next five years. Combine those costs and you should be setting aside $854 a year, or about $71 a month, into a separate account earmarked for auto costs.

If your Civic is a 2004 model, the average costs go up to $4,944 for maintenance and $2,581 for repairs over five years. That means you should be setting aside about $125 a month. If it sounds like more than you'll need, well, then, you'll have a down payment for a newer car that much sooner.

What if your car is older? Collect your maintenance and repair receipts from recent years, figure out a yearly average and then inflate that by at least 10%. You also can ask a trusted mechanic what repairs are likely to be in your future, and add those costs as well.

Continued: A home cash cache

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