In the six months I’ve been budgeting I’ve passed through two phases.
Phase 1 was “Getting used to budgeting.” Tracking expenses, reconciling accounts, living the first three rules and eventually Rule Four, having the experience of using my budget to make spending decisions. Learning the YNAB way.
Phase 2 was “Cutting expenses and living within my means.” I built a budget that fit inside my income. The new budget helped me and Kate spend over $100 per month less on groceries, reduce our eating out by more than half, and drop our expensive smart phone plan (to the tune of over $110 per month in savings).
With phases 1 and 2 behind me, I’d like to move on to a third phase called “Finally getting ahead.” But as I review my budget, I see some weak spots that threaten my early momentum.
Ask yourself if any of these vulnerabilities apply to your budget:
1. The “Dental” Category.
With no dental insurance, Kate and I set aside $100 per month for all things teeth-related. This category feels very “head-in-sand”; a single big dental event would overwhelm my slowly-growing category balance.
If each member of the family gets one cleaning per year (yes, I know they want you to come in twice per year), that’s $600 per year (4 x $150). That leaves $600 to cover the cost of reparative work.
My son had a cavity filled last month at a cost of $184, which means the category allows for less than one cavity per year per person. Having incurred a four-figure dental bill early this year (just for myself), $600 per year for repairs seems too low.
2. The “Other Medical” Category.
The entire family is covered by high deductible health insurance, which means any medical event will get very expensive for us personally before the insurance kicks in. My maximum out of pocket per year runs close to $20,000, so I’m not really covering things by setting aside $25 per month for this category.
3. The “Home Interior” Category.
Appliances break and carpet wears out (especially cheap carpet installed by the builder because we didn’t pay for the upgraded option). A dishwasher costs $300 to $700; you’ll spend $1,500 to $2,000 on a fridge. Repairs on either run a minimum of $150 to $300 (when you’re like me and don’t have a prayer of fixing it yourself).
A mishap in this category won’t ruin your life, but will be a hassle. I should know – Kate and I have been without a dishwasher for three months (still working on building up the category balance to either repair or replace). Fortunately, I find washing dishes oddly therapeutic. Unfortunately for my Kate, she doesn’t.
4. The “Car Insurance” Category.
It’s nice to save a few bucks by keeping both cars on “liability only” coverage, but my father-in-law recently pointed out to me that the cheap, limited coverage only makes sense if we don’t mind walking away from a totaled car.
Walking away from a totaled car would mean a) going to one car (which we considered, but then acknowledged the convenience of the second ride), or b) financing a new (or used) car. I refuse to borrow for a car again, so wrecking one car would mean going without. If bumping up our coverage isn’t too expensive, I’ll be switching back to more comprehensive policies.
5. The “Car Maintenance and Repairs” Category.
Having just spent $1,422 repairing and maintaining my 12-year-old Honda Civic, my “repairs” category balance is really low. Our other car has just passed 100,000 miles, which means it likely needs a similar level of attention.
The Role of My (small) Emergency Fund
Is it realistic or practical to build up a $20,000 “Other Medical” category? Probably not. Major medical events are unpredictable expenses, which means I consider it the role of my emergency fund to support whatever balance I have in the medical category.
But dental work and car and appliance repairs/replacement aren’t unpredictable – they’re inevitable. I may not know when we’ll incur the expense, but I know the expense is coming. That’s why it makes more sense to me to build up and maintain those category balances.
So, those are my weak spots. Here are a few others all of us consider:
Potential Weaknesses in Your Budget
1. Lack of life insurance.
If your untimely passing would put a financial strain on your household, you need life insurance. You don’t want to leave dependents without your income but with your bills and debts.
2. Lack of disability insurance.
I thought about including this in my budget’s weaknesses, and it’s something I’m definitely going to check out. If injury or illness would prevent you from earning for an extended period, disability insurance might make sense.
3. Lack of Proper Tax Withholding.
Tax season was my most stressful time as a self-employed person. Around December or January I’d work with my accountant to get a rough estimate of my taxes due, then scramble to come up with the money by April. A couple of times it took me all the way to the following December to come up with the money, which meant hundreds of dollars in fees and interest.
In 2012 I finally committed to proper withholding. I hated setting aside those thousands of dollars for tax day, but it paid off: for the first time in five years, I got a refund of a few hundred dollars (not that a refund is something to celebrate – it was just an indication that I’d finally withheld an amount very close to what I actually owed).
If you’re self-employed, set up an account at eftps.gov and make regular tax payments. Get the money out of your account and into Uncle Sam’s. It won’t be fun, but it will help you sleep better at night.
4. Lack of a car replacement fund.
We’re all going to have to replace our cars eventually, and ideally we won’t have to borrow when that day comes.
In yet another example of how Debt Wrecks Everything, my desire to beef up these categories is at direct odds with my desire to get out of debt. Because I have a small emergency fund in place, it probably makes the most sense to continue the fight against debt while relying on the e-fund to cover my small category balances for the time being. But at least I’m aware of my vulnerabilities. When there is extra cash available, I know exactly where it needs to go.