Money Matters: Budgeting for big new expenses
Times are changing, and prices are increasing at a fast rate many can’t keep up with. A study by tradingeconomics.com shows that the annual inflation rate reached 8.6% in May. This is the highest it has been since December 1981. “The average household’s monthly expenses are $5,111 ($61,334 per year),” said Lyle Daly at Fool.com. “The average annual income after taxes is $74,949.” As you can imagine, that leaves very little room to budget for big expenses.
How can you start budgeting early for big expenses? At some point, we’ve all wanted to make a big purchase and haven’t quite had the money to do so.
Fortunately, there are a few simple steps to get you started. The first step is to save your extra cash. When the time comes to add on a big expense, make sure you are being intentional with what you spend your money on. Lastly, have a clear plan of how you are going to pay for your big new expense.
There is a common rule created by Sen. Elizabeth Warren of Massachusetts called the “50/20/30 budget rule.” The tricky part is implementing it into your routine. As Investopedia.com explains, “The basic rule is to divide up after-tax income and allocate it to spend: 50% on needs, 30% on wants, and socking away 20% to savings.” You will need to divide up what money you are spending on your needs/wants and how much you are putting away for savings. You might be surprised how much you are spending in certain areas. This is a good time to cut back on any unnecessary expenses.
Be intentional with what you buy
There are several questions that you should ask yourself before making any big purchase for the wants category: Will this expense end up being an asset to you? How long will it last? Are you going to end up having to replace it within a couple of months? Are there cheaper options that are just as good? Will this expense bring you joy?
What about the expenses that you can’t control, like an ER visit or a pipe breaking in your house? This is where your savings should come into play. Medical or other emergency expenditures often happen when you least expect it. Without built-up savings, paying for these types of expenses will likely result in additional debt. This is why it’s better to start preparing early even if you are not planning on having a big expense in the near future.
Make a clear plan
Having a clear plan for how you are going to be able to make the payments and how much the payments will be if you don’t pay for the expense up front can be crucial. If you can help it, this step should come before making the purchase. Having this planned ahead of time will help you be able to budget this expense into your monthly spending.
This also will help you visualize if you have the funds to be able to prudently complete the purchase. According to Investopedia, “A budget helps you figure out your long-term goals and work toward them. If you just drift aimlessly through life, tossing your money at every pretty, shiny object that happens to catch your eye, how will you ever save up enough money to buy a car or put a down payment on a house?”
It can be overwhelming budgeting for a new expense, but taking a few extra steps can turn into an easier task. As you are spending money, make sure to put a little bit away for savings, ask yourself a few questions before making your next big purchase, and always have a clear plan of how an expense will fit into your budget.
Lindsey Certonio is a project manager at Stage Marketing, a full-service content marketing agency based in Provo.