Apr 1, 2010

Making Adjustments To Your Budget

Reader Kim sent me an email with an interesting question that I thought was worth addressing in a full post since it’s something that everyone has to deal with at some point: How do you pay for irregular expenses?

Let me start with a caveat: there are many ways to handle this issue, and I’m definitely not an expert. However, I have a few ideas, and I can share what works for me.


There is one thing you must do before any of my suggestions can work for you, and it’s this: You must live below your means.

And by that, I mean that you must spend less than you bring in each pay period. Because if you are spending more than your income, then there is simply no way you will be able to set aside money for those irregular expenses.

But let’s assume that, like Kim, you have a budget that’s pretty realistic. So, for example, each month you set aside $500 for groceries and household expenses, $1000 for daycare, $200 for utilities, etc. Then the question is: How do you prepare for irregular expenses?

Kim specifically mentioned expenses like kids’ sports and car repairs as her budget busters. Personally, I am usually able to absorb such expenses with my regular income – in other words, I pay for such expenses with money that would have gone into savings instead.

But I realize that I am in an unusual position, because we are able to save a substantial amount of money each month because we’ve paid off all of our non-mortgage debt. And, being an attorney, I make a pretty good salary that’s higher than most.

So what should you do if you don’t make enough each month to be able to pay an unexpected $300 car repair bill?

Let’s go back to that budget, and what I said about spending less than you bring in. Part of your monthly budget should be earmarked for savings. Hopefully you are saving for retirement, and maybe you even have enough to invest in a 529 or other investment account. But when I say savings in this context, I mean a taxable, liquid bank account that you make a regular deposit to each pay period. You can call the account a savings account or an emergency fund, the name doesn’t really matter. What matters is that you’re setting aside money each month for future expenses instead of spending every dime that you receive.

The amount you deposit each pay period will depend on how much wiggle room you have in your budget, and how much you tend to need on an irregular basis. Parents who have to pay for seasonal activities will have a greater need than someone who just needs money for car maintenance.

The basic idea here is that when it’s time to enroll Junior in baseball for $150 or the mechanic tells you it’s time to replace the brakes for $300, the money is there in the bank. Therefore, your budget is intact.

If you find that you never have enough in the bank, then you’re not living within your means. You need to cut back somewhere, whether it’s going to the movies less often, spending less on groceries, or reducing the amount you save for retirement. I’m not advocating that you cut back on retirement savings, but you have to make a choice about where your money goes. And that’s the "secret" to a balanced budget.


Lie said...

I'm with you in that we can usually absorb these expenses with our monthly income (barring something catastrophic). But we also budget for them. For a car expense, I'd take that out of my automotive expenses category, which we usually fund expecting an annual car repairs of something around $1000 for our two relatively new cars. As long as the transmission doesn't fall out in January, we're usually ok! The backup plan for car expenses is to take the money out of our new car fund. For other things, we use budget categories like "household maintenance" that are based on regular maintenance but also includes money for at least one "catastrophe" each year. (I was glad I had that the August that the air conditioning died.)

I'll caveat all of this by saying that we may have a little more leeway because we are also a (2) lawyer family, but it's something that others can do too if they save to build up these emergency funds over a few years.

Aviva said...

We do it pretty much the way Lie described. In our monthly set-aside for automotive stuff, there's $$$ intended for both the routine (gas, oil changes, regular maintenance kinds of things) AND a buffer intended for repairs, which we carryover every year. The bulk left in that category gets moved to our new car fund in January, and if we ever had repairs greater than our automotive fund, we'd dip into the new car fund. But that's only happened once in 10 years of budgeting like this.

We also have what we call the Oh My Fund!, and yes, the exclamation point is part of the name of that budget category. We've used money from that category for anything from vet bills when our elderly cat was very sick and eventually needed to be euthanized or to buy a new washing machine when our old one flooded the laundry room and repairs would cost more than a replacement.

We do it on a single income (but that income is earned by an engineer), and it helps a lot that my husband and I were both taught as children to live within our means. (Although we both have siblings who failed to learn those lessons, so maybe it's personality type more than childhood lessons?)

I truly believe the best way to manage to live within one's means (especially when those means are limited) is to create a budget, and then track all spending and savings. We literally track every penny we spend, and we tweak the budget when necessary and/or annually. The other key, for us, is that we don't run out and buy lots of stuff. Two of our three TVs are 20+ years old and working fine. The newest one is 11 years old. Sure, I'd love a flat screen tv, but it's just not a priority for us.

Love this blog, which I found originally off Get Rich Slowly when you did a guest blog post a couple years ago, I think it was. :-)
Anyway, I love this blog although I rarely comment.

Denise said...

We are living off one salary, that of a city employee. We worked together on the budget and we have several different savings account for several different categories: car maintenance, car replacement, Christmas, vacations, and ooops! Our only child is two, but I'm sure we will have to expand our categories later. Then when hubby gets paid and I pay the bills the savings accounts get paid too, right then. If it's not in the checking account I don't make mental plans to spend it. You'll find that most banks don't care how many savings accounts you have linked to your checking account, if it makes it easier for you to do it that way.

Chief Family Officer said...

@Lie, Aviva & Denise - I'm so impressed that you're all doing so well, but I have a question ... How do you decide how much to put into each category?

Anonymous said...

Cathy, I appreciate you taking the time to answer my E-mail, and in such a fashion, as to make an entire post about it. You helped out very much,it made perfect sense, We will definately be implementing some of your strategies. I also might add, I only read a select few blogs, only the ones I feel I can really learn a thing or two from. You do a wonderful job with your blog, which I already thought anyway, but I was able to find out first hand how much you actually care about your readers and the issues they are having with their finances. I am so very impressed. Sincerely Kim

Denise said...

Lots of negotiation! It helps to have both of us working on the budget. I pay all the bills and do almost all the shopping. (It is very rare for my husband to spend money on the "card" except for gas.) It works better to have only one person in charge of knowing what bills have come in and which have been paid. However, at least twice a month we both balance the checkbook, so we know what the totals for all accounts are and neither one of us is forced to tell the other one, "but we can't afford it".

Vacation gets $30 a pay check because that's what we saved per paycheck when we changed his paycheck withholding after the birth of our son. Christmas gets $40 a month based on what we spent on last year. (our Christmases are simple) Our car replacement/major repair budget is $150 a month, on the theory that after 7 years of that, we'll probably have spent about $2000 of repairs on our now 3 year-old car, and have $10,000 for a new (used)car. Over all, it just helps to have two people doing the budget categories, because he challenges things that I have a blind spot about (groceries) and I challenge thing he has a blind spot about (vacations).

P.S. Just like you have expenses that aren't monthly, you also have income that isn't monthly too--your tax return, extra paychecks for those of us who get paid weekly or bi weekly, bonuses, a rebate check from the escrow company. It's good to have a plan for any "extra" money that may come your way, to sock it away for "extra" expenses, instead of spending it as soon as it arrives.

Aviva said...

You asked how we decide how much goes in each budget category.

We've been doing budgeting since we joined finances in 2000, about a year before we got married. When we started, we went through our checkbook registers and credit card bills and calculated about how much we'd spent in 1999 in each category. Then we calculated our anticipated net income (which was a little complicated because I had a part-time job and a startup freelance writing business that I didn't know how much it would generate).

We first allot money to the fixed expenses, like mortgage, utilities, etc. Then we have a big list of our wants, and we negotiate with each other to figure out how we can get as many of our wants figured out. Our various savings funds (which are really all mixed up in one checking account, one money market account at Vanguard, and a variety of retirement accounts) are funded in the first batch of allotments, although there's some negotiation even there.

Our various funds are really only designated in our Excel spreadsheets. We're probably over-generous in our food budget because while I like to use coupons and stock up on sales, my husband won't wait for a sale to buy some food he really wants or thinks he needs. So that's a compromise. We used to eat out a lot more frequently pre-parenthood, but now that I have to eat gluten-free foods, the extra expenses there have sucked up our eating out money.

We also tend to use what we call "found money" for fun stuff that we couldn't figure out how to fund on a monthly basis. Found money is anything we weren't counting on, like a bonus from his employer, a tax refund, my selling stuff my daughter has outgrown on Craigslist, etc. My husband does woodworking as a hobby, and we've been saving found money towards buying him a SawStop tablesaw to replace his perfectly good (but not as safe) Delta tablesaw. The saw is about $5000, and we've been saving for it ever since we first heard about it five or six years ago. He'll finally get it later this spring. At least 30 percent (and usually 50 percent or more) of found money gets divided between retirement savings and college savings for our 5-year-old.

Anyway, we tweak the budget annually. And some categories end up going in the red, but there's always enough categories in the black to balance it out at the end of the year. Utilities have been particularly hard for us to predict each year because they've gone up so rapidly the past few years. So every December, I seem to end up pulling extra money that accumulated somewhere else (often automotive) and using it to zero out our utilities category. And then we increase our utilities category for the following year and hope it will be enough.

Sorry -- I think I've written you an entire book here! :-) But I hope it helps explain how we manage.

I do think it helps that we've both always been savers our whole lives and never had any consumer debt beyond car loans (which we've avoided the past couple cars) and the mortgage. When we started talking about making a baby, we immediately started saving both for the baby expenses AND for college. We live modestly and don't rush out to buy the latest gadget. (I *just* got my first/only iPod a couple months ago.)

p.s. Thanks for coming and visiting my blog too, Cathy! I appreciated your kind words! :-)

Chief Family Officer said...

@Kim - You're very welcome. I emailed you again :)

@Denise and Aviva - Thank you for sharing your experiences. I found it very valuable. I particularly like the idea of saving for auto maintenance and putting any extra in the new car fund at the end of the year. Thanks again!

Lulu said...

I budget for savings and I also have an Irregular Fund set aside every month. This goes to pay the things that come up that we tend not to think about.

In my case this will be car repairs....and since I spend less on gas than I budget, the balance left over from gas goes into this fund.