Designing Your Budget, Continued – Categories That Are Easier to Adjust
Other than mortgage debt, if you have chronic debt then you hopefully understand why it’s important to get out of it if you can. Interest expense is eating up your retirement – and that’s not an exaggeration. High debt is keeping you from living the kind of life you want, and, especially once you start having a tough time paying the bills, adds massive stress to your life and shortens your lifespan.
You may not be able to get out of debt immediately, but the sooner you do so the higher Your quality of life will be.
To estimate how much to allocate to this budget category, determine the minimum payment you must make to each creditor and add it up. This will not get you out of debt fast, but it’s a good starting point because you know you have to make payments of at least that much.
Once we’ve finished our budget if we have money left over we can come back here and commit more money each month to paying down our debt faster.
· Credit Cards
· Student Loans
You want to have savings for a couple of reasons: you want to have an emergency fund for unexpected expenses, and you will want to retire one day. When you do, you’ll be much happier if you have some savings to fall back on.
If you have a large amount of debt that you owe, however, you may want to be very conservative with this category. Absolutely you’ll want to concentrate on building up an emergency fund, because we all need one, but the interest you are paying on your debt is eating you up alive, and paying that down quickly will also make your life better.
Only you can decide what the right trade-off between building up your savings and paying off your debt should be. The faster you pay down your debt, however, the more money you’ll have when you retire. Just a thought.
Start off with a relatively small number for this category. You can always increase it later when making adjustments.
· Emergency Fund
· Retirement Funds
· Long-Term Savings
· Savings for Purchase (Home, car, vacation, sailboat…)
For automobile expenses you’ll want to add up a few different items for the category.
You might have a car loan or lease payment. (If so, make it a priority to pay it off fast.) If not, you will still have gas, insurance and maintenance expenses.
Your car or lease payment is easy to determine. In fact, you probably know it by heart.
A budget for gas is not too difficult either. Look at your gas expenses over the last year and divide by 12. You might add a small bump to acknowledge that gas prices could go up soon.
Insurance should also not be difficult. Most of us pay car insurance annually, rather than monthly. Simply take your annual cost and divide by 12.
Maintenance requires a little more thought. You’re certainly paying for routine maintenance – oil, lube and filter a couple times a year. That’s a pretty predictable expense. Then you’ll need tires and alignment every three or four years, and every once in a while, you’ll replace brakes or need something else replaced or repaired. Add up on what you spend on these predictable expenses over the year, and divide by 12.
For the unpredictable expenses do an internet search for “average annual maintenance cost for cars” you’ll find tons of useful sites that help you come up with some very round, ballpark numbers.
Perform the same search for the year, make and model of your specific car and you might be able to refine that a bit. Finally, compare that to your own history of maintenance costs. If your unexpected maintenance costs have been substantially less than the average, resist the temptation to use your actual costs. It’s possible you’ve just been deferring maintenance, and will be faced with bigger bills in the future that you can’t postpone.
Add the expected and unexpected expense estimates together, and whatever your annual estimate is, divide by 12 for your monthly maintenance bill. There will be many months where your actual expense is zero; don’t fool yourself into thinking that “saved” money is available for other things. You’re going to need it eventually when your transmission fails.
Don’t forget minor costs like parking and car washes, if you pay for those on a regular basis. They probably don’t add up to much, but if you do have to pay it’s real cash that comes out of your pocket, so look back at the last year to see how much you spent, and carry that forward to your budget.
Finally, many folks today are foregoing cars altogether. If this is you, unless you’re a hermit you do travel somehow – whether by bus, metro, train, Uber or Lyft, you almost certainly have some travel expense. This is a good category to use for all those travel expenses.
· Regular Scheduled Maintenance (Oil, Lube, Filter)
· Regular Infrequent Maintenance (Tires)
· Unscheduled Repairs
· Public Transportation
Most people have no idea how much they spend on utilities. When you add it up it can be quite a shock. It would not be unusual if your utilities ran as much as a luxury car payment every month.
The real trick here is to not forget anything when you’re adding up the various utilities you pay. This list may not be comprehensive, but it might help trigger your memory if you’re forgetting anything. In all likelihood you are paying most, if not all of the following:
· Water (and sewer sometimes)
· Television (Cable, Dish or DSL)
· Television (Internet-based services, such as Netflix)
· Cell phone
You might also include monthly services that you pay for, such as computer help desk, yard service, pest control service, etc. in this category. These are committed monthly expenses, but are much easier to make adjustments to than “housing” expenses, and so go better down in this section.
Once again, if you go back through your last year’s receipts you will be surprised at how much you spent in this category, especially if, like us, you include dining out and coffees in “entertainment.”
The obvious items you’ll want to include will be movies, fun outings such as amusement parks, a night out listening to music or meeting friends for drinks.
The main point of this budget category is that everyone needs some entertainment in their lives, yet it is an area where most families spend so much that they have to give up other priorities to pay for the entertainment they want. (Especially dining out.) We’re not asking you to give up anything – that is something only you can decide.
But when deciding what to include in this category, think of money you spend that is clearly optional. Anything that you could – if you wanted – cut out completely.
Then don’t cut it out yet. Look at your spending on all these areas over the last year, and use that as a starting point. Maybe you don’t need to cut back!
· Dining Out (Include lunches)
· Events (Movies, Comedy Clubs, Music Concerts)
· Social Events (Meeting friends for drinks)
· Other Entertainment
Everyone has some expenses that don’t fit neatly into the categories they’ve chosen. Resist the temptation to create a bunch of small categories for little things that might seem to you to not easily fit neatly into one of the categories above. For instance, maybe you are a big fan of quilting. Where do you put quilting supplies? You could create a separate category for it, but chances are it’s a very small expenditure, and there is probably little opportunity to balance out your budget using such a small category. Instead, include your quilting supplies in this category, along with other occasional, random or regular but very small expenses.
Sara Colley, Staff Writer
Financial Help Desk