Monday, December 7, 2015

Why Your Monthly Budget is a Dangerous Myth


Caution:  Your Monthly Budget is Only About 66% of the Story 

I have a budget built after years of study – and it’s about $3K per month in expenses.  At least that was the target amount that would allow me to claim financial independence from the MegaCorp life while still living well on less.  
It even included money for several “sinking funds” of savings for the nasty surprises that will happen eventually, but of course -  just not this month.   For example, I will need a new car someday, just not this month.  I will need new glasses that cost about $500, just not this month.     The appliances will someday go ka-put, just not this month.   Hmm…. 
But as smug as I’ve been about building a great budget including savings accounts for the “just not this month” expenses – the last few months of backing away from MegaCorp life have given me the time to examine what’s really happening in my financial life.
Basically, I’ve been fooling myself by woefully under funding those accounts.    What I’ve realized is that at least one of these “just not this month” expenses  seems to happen every month!

For example, during 2015 the “Not This Month” expenses included...
a)  Travel to attend a funeral and a graduation.  Wedding and baby shower gifts.
b)  Summer vacation travel expenses more than expected.
c)  Business development event registration for side-gig, professional membership dues.
d)  Old printer died
e)  Tooth needed to be extracted and an implant purchased ($4k!) 
f)   Refrigerator died

There is more on the list!   I did have sinking fund savings for most of these items, but not enough.
Check out this visual from Sassy Cents – she gets down to the pennies about her non-monthly expenses and even this adds and extra  $120+ to her budget every month.
Other bloggers I like to follow also pointed out how unexpected expenses during the summer of 2015 took a toll on their finances.    

So? The Fix.   

A more realistic estimate:  Man Versus Debt suggests that you   “estimate your yearly expense and divide by 10 instead of by 12” to create a better monthly estimate.  If I do my math right, that creates a 16% cushion for unexpected expenses.
Since I’m single, I think I need to do more than that.   I am adding 33% to my overall budget total.  Instead of expecting to spend $3K, I expect to spend $3.9k each month.  The extra $900 goes into various irregular accounts – gifts, travel, and household as well as my Roth IRA.   As a single person I have less to fall back on, so I think this is a good strategy.  And it’s a more realistic one.   
But it was hard.   I was reluctant to admit all this to myself  because it means I require a $46K annual expenses drawdown from investments instead of $36K. Being able to stay close to the $36K per year figure was the key to being able to live off my investments, instead of relying on MegaCorp or side-gig income.     
Gaining clarity on my own "Consumption Satisfaction Index" 
So I’m working through other ways I can reduce expenses without reducing the things in life that give it meaning.    I realized that having enough extra cash to travel to see family this summer, to give my nice a small graduation gift, to buy dinner for a family member – all of that was more important to me than the savings account.   
But I don’t care about a big house, new clothes, a new car. So, I'm trying this: 

a)     Moved to less expensive housing in September.     I’ve you’ve been reading this blog, then you know I don’t care about big houses anymore, so this was easy. 
b)     No new clothes for now, I have enough.  Besides, I don’t have enough space to put anything else.
c)  Strike point pricing is back in my life.  See a can of black or pinto beans under $1.00?  Buy 5.  Also couponing, and grocery shopping at the Dollar Tree. 

By backing away a bit from MegaCorp life, I have been able to focus more clearly on MY money (versus their money).  This has helped to mitigate my losses and should serve me well in future.    What did I do different?  As many financial pundits advise – I’ve had to time to watch every penny come and go.
These sinking funds are making .075% in a Capitol One Online Savings account (previously ING Direct) .   Because most of these funds are “pre-pay” sinking funds, I’m not as concerned about getting a higher rate in a lock-in CD.   But to offset the low rate, I have also stashed some of my long term savings cash in Barclays CDs earning 2.0% or more. 

Do you use sinking fund or pre-payment accounts?  How much is enough in your opinion?