Everything was going fine until… *INSERT EXPENSIVE PROBLEM HERE* happened.
A common complaint I hear.
Diving deeper into this issue I often find that the real problem is my clients feel they are living within their budget; so well in fact that there is extra cash at the end of the month to splurge. Things are great until…
- A car breaks down
- We take an expensive trip to the ER
- Drop an iPhone in the toilet
- It’s time for seasonal shopping again.
To disbelieving eyes, I point out that these “unaccounted expenses” were in the monthly budget, but since they don’t happen with regularity the surplus has been spent on splurges. For example, I’m not really expecting them to have car related expenses of $50/month, but I do think it’s reasonable to plan on 1-2x issues totaling $600/year. Even a new car will warrant some work 2-3 years down the road when it needs a major overhaul of service, tires, and brakes, costing well more than $600.
So how can we trick ourselves into realizing that there isn’t “left-over” cash just sitting in our checking account waiting to be spent?
We open another account, if not multiple accounts, to funnel that money into for future use. Remember your grandma’s Christmas and Vacation Fund? That’s what this is, except much more convenient because online banking can be utilized making it a lot less cumbersome to keep track of. I’m not suggesting that this is necessary for everyone living by a budget, but some of us need encouragement of the “out of sight – out of mind” variety.
Money Peach wrote a great piece on this, where they refer to these accounts as “Sinking Funds.” If this post spoke your language, I urge you to read more about setting up these accounts and the many categories they could apply to.