Planning For Various Expenses
Successful money management starts with planning for expenses. There are multiple areas of expenses that are necessary to consider. Planned expenses and unplanned expenses. The great thing is that you can plan for unplanned expenses.
On a monthly basis, you should start by mapping out your planned expenses. This includes fixed expenses like rent and utilities and also “lifestyle” expenses such as food, entertainment, etc. Add up these numbers and call it P.
Next, determine a budget for unexpected expenses. These are expenses like home maintenance, auto maintenance, medical bills, traffic tickets, etc. If you’re able to look at your year last year and get a rough estimate of what you spent on these type of items, that will help. Add up these numbers, then divide by 12 to get a monthly number, U.
The last type of expense we need to account for are irregular, expected expenses. These are the one time payments or bi-annual type payments like life insurance, auto insurance, maybe an annual vet appointment for your pet. Add up your estimate for these payments for the year and divide by 12 to get a monthly number, E.
P + U + E = T where T is your Total Monthly Expenses
Now, let’s look at your income. Take your monthly after-tax income, I. If T > I, then you have issues. I – T = S (your monthly savings. Your overall financial goal is to increase S by a combination of increasing I and decreasing T.
Going back to your expenses, it’s important to plan for U and E. Because these expenses are irregular, meaning they aren’t a consistent monthly expense, you should be stashing away U and E each month into a bucket / savings account so that you have the cash readily available when those expenses actually hit.
I just got hit with a $500 air conditioning repair bill (you know, just living the American Dream). Thankfully, I had been moving money each month into a “Home Maintenance” bucket to prepare for such an unexpected expense as described above. Prepare in a similar manner and you can avoid going into credit card debt when you get hit with various things. Leave yourself a larger gap between T and I and you will have a monthly buffer in case those unexpected expenses are unexpectedly high. Again, avoid the credit card debt. This is a simple look at smart money management. We’ll continue to dive deeper into the subject.