Posts Tagged Personal Finance
How to Expect the Unexpected (Expenses)
Posted by Sonny in Personal Finance on May 18th, 2009
Doesn’t it seem like there are always expenses you never expected? Today the ignition system on my car broke, last week my girlfriend’s car needed a new battery ($75) and yesterday one of my dogs was violently sick and had to go to the vet ($260). Some older examples for me have been spur of the moment flights, a speeding ticket (2 days after my birthday, no less) and my car breaking down. While it is frustrating, these are things that have to get fixed but weren’t necessarily expected.
So how do you financially plan for the unexpected? When I pay my bills, two Fridays out of every month, I set aside $250 ($500 a month) in a separate bank savings account. The reason for this is purely psychological. If I don’t see it in my main account, I think I spent it. Therefore if I don’t use the money I can keep it there as next month’s cushion or move the money back. How did I come up with $500? It is not based on income or anything like that. I just happened to notice that when something unexpected comes my way it typically costs me $250. Therefore my number is just 2 * $250 =$500. Everyone will have to optimize based on their own personal financial experience but that’s how I do it.
This whole exercise is psychological but so is most of personal finance and investing. When an expense comes out of the blue, I know I have fund set aside and it puts me at peace. If I am expecting to pay $0 for a sick dog but really have to pay $260, I am going to be upset and in a bad mood. If I plan ahead however, and set aside $500, I have only $260 of unknown expenses. Rather than feeling stressed and struggling to find extra cash, I am in a great mood. Is anything materially different? No, but expecting the unexpected and preparing for it put me in a better mood and that’s what life is all about. Hopefully I will still be in a better mood after I find out my ignition repair bill!
Trash Your Budgets
Posted by Sonny in Personal Finance on May 13th, 2009
One thing I pride myself on is tracking my spending; I know how much is in my account, what bills are coming, and how much I spent on bills previously. If I can’t keep track of all of these figures in my head, I can cheat and go to mint.com. Even though budgets are a highly recommended financial tool, I have noticed a couple of interesting, and dysfunctional, things about them. People who track their spending don’t really need a budget and ironically the people who have no idea how to spend their money don’t need one either! For people who track their spending, a budget doesn’t really add any value. People who don’t track their spending might not be aware of how to do so. This creates two questions: how would they come up with a budget and how would it help? If you know what you have spent on something in the past you can reasonably estimate what that expense going to be in the future but if you don’t know what you spend your money on, then a budget isn’t going to help you at all. So knowledge is the key, not budgets.
After trying to create my own budgets and following them religiously, I realized that I couldn’t do it because budgets are a sort of fantasy endeavor. I’ll explain: let’s say I budget $100 per month on cable TV/internet expenses. Sounds great until my cable company raises my bill to, let’s say, $120 per month; but I only budgeted for $100. What does this mean? Nothing and that’s my point. Budgets don’t help because they are created with numbers that really have no meaning. Let me give you another example, let’s say you budgeted $200 for Dining Out this month and you have spent $180 so far. Your spouse/significant other really wants to go out to eat at a fancy place. What do you do, say “It’s not in my budget”? That’s a great way to start a huge fight! Not only did budgeting not help you but it made your life worse.
Knowledge is the key. If you know what you have spent your money on, you can throw those budgets out. If you can lower your expenses, you most likely will. If something comes up higher than it has been, you will look more closely at it. In the cable bill example, I would probably call the company and go from there. Maybe due to your watchful eye you will get them to reverse the charges. But the Budget will not help you either way, your knowledge will!
If you don’t know what you are spending your money on, don’t budget, start tracking.
Here is what you should be doing:
1. First write down your income for the month (most people working a 9-5 this doesn’t change much fixed).
2. Go through all your expenses - this will be tough for a first-time person doing this. Write everything down, don’t judge yourself and total it up.
3. Subtract the first two numbers (Income – Expenses) and if it’s positive great! If it’s negative, don’t worry! It can be changed but at least now you know!
Summary: Budgets are useless but knowledge is the key.
