What Is A Contingency Budget?

by Mel
(Gloucester)

A few people have mentioned a 'contingency budget' to me as I'm pulling together a budget for my parents 40th wedding anniversary. I'm fairly new to budgeting, so was wondering if you could clarify what it is and how does it work?

Answer:

Congratulations to your parents! It sounds like you've got your hands full preparing for their party.

Many people I talk to don't know what a contingency budget is, so it's a great question that you've asked.

A contingency budget is usually an amount of money you set aside for unexpected items, additional costs or 'over runs'. (An 'over run' is where one area of a budget has gone over the specified amount.)

In the instance of your party, you may have suprise additional costs such as party favours, increased costs from the bakery for the cake, or you may have budgeted £40 for glass hire, when in fact you needed a lot more than that, so you over-ran.

When planning a project, you would allow for a 10% contingency. So if you're budget is £1,000, your contingency budget would be £100 with all your other costs being £900.

You don't have to use the contingency budget, but more often than not people do. It's a cushion for the unexpected.

Although the contingency budget is there, you shouldn't use it as a fail-safe mechanism for going over your total budget. 10% may not cover the additional costs, so in this case, you would need to adjust your thinking and coming up with a different solution.

I hope that helps!

The Budgeting Steps Team