“Wisdom is learning to let go when you want to hang on. Courage is learning to hang on when you want to let go.” – Mark Amend
This is second in a continuing series on real financial independence, and I’m here to alert you to those items in a family‘s financial life that can wreck the well-planned budget…
Interest on debt
There’s no excellent reason to buy anything on credit. If you find yourself considering an expensive purchase and then trying to find the payments in your budget, you are planning for failure. The only two loans you should even consider are a home mortgage loan and a student loan for an education or training that increases your earning potential. Money makes money. Credit does the opposite. Debt breeds poverty.
The average American family carries close to $10,000 in commercial credit. At 18% interest, that’s $1,800 a year or an unnecessary $150 every month per household. If you put that payment into the markets every month over your working years, earning an average 10% return (for calculating our example here), you would retire with an additional $1.5 million.
None of us can anticipate all our expenses. Every stage of life brings a whole new set. Perhaps extensive study and research could help you prepare. But it is easier simply to budget 10% for unknown unknowns.
Review the insurance coverage for your car and home (if you own). A deductible and perhaps a 20% copay often apply. Out-of-pocket expenses could run several thousand dollars. It is more important to limit the maximum expense than to make sure the deductible is low. Budget for the deductible and copay expenses.
Medical expenses are rarely planned. To prepare your budget, have some insurance in place that will limit your catastrophic loss. Second, set up an emergency fund that will cover your expenses if they reach that limit.
Car repairs and replacement
Your car won’t last forever. It will need major repair at some point and ultimately replacement. Decide how much you are willing to spend for the lifestyle you want, and then budget for it. Don’t buy a new $30,000 car and think you won’t have any car expenses for the next five years. Even if you plan on driving your new car for the next decade, you have to start budgeting for repairs and your next new car now.
Don’t borrow to buy a car and then start making payments unless it comes with very low interest rate charges. That’s nearly always a bad idea and simply ensures you won’t save, invest or grow rich. If you can’t afford to save the payments in advance, you are stretching too much. Buy used or wait.
Owning a home and surprise expenses are practically synonymous. The roof might leak. The plumbing could need replacing. A tree may need to be taken down before it falls. The heating or cooling system could need repairs. The carpet will need to be replaced.
So I recommend you set aside at least 1% of the value of your house for repairs, not enhancements, each year. If you have an older home, increase the minimum to at least 2% of its value.
Another unexpected category is emergency travel. Family illnesses, weddings or funerals impose themselves on a family’s budget with some regularity. Sometimes even family vacations, graduations or other gatherings can strain finances. If you are both of humble means and have a large extended family, your budget could break under the strain. These are not easy decisions.
If you really get strained, I suggest you swallow some pride and ask for help with travel or accommodations. I know that family expectations can seem unreasonable, but speaking the truth in love is always a good response.
Here’s my bottom line: No budget can anticipate every major expense. Life serves up surprises with some regularity. So if we can all put some healthy margin in our daily living expenses, it will give us the stored resources to weather these major bills and then better plan for them going forward. Around here, we love to help our clients set up a private reserve strategy so that they have funds available for all of life’s unknowns.
And, as always, my team and I are here to help! If you need someone, even just to run ideas and budgets by … we’re here for you.