Understanding your expenses is a major part of financial planning. Regardless of your situation, it’s crucial to understand your monthly cash flow and do some budgeting. This allows for a reliable budget setup and realistic spending habits. Once you undertand your current financial needs and get a good financial plan figured out, you’re set…or are you? One thing I’ve learned is a budget that works today, may not necessarily work in the future. Life moves fast, and if you don’t stop to take a look around, your expenses might just pass you by.
Many people tend to only look at their current expenses when budget planning - which is certainly a good starting point. However, one thing we can count on is that our expenses will inevitably rise over time. Failure to get ahead of these rising expenses can cause even the most carefully thought-out budgets to go awry. There are several key categories to keep in mind when determining budgets - let’s look at a few.
Housing can take up a major portion of monthly expenses. Whether you rent or own, you can count on this expense taking a significant chunk of your income every month. And in many cases, it can continue to rise. If you're not ready, your financial health could suffer.
For those who rent, it’s standard for payments to increase a certain percentage each year. Rarely is rent lowered or unchanged. Landlords and management companies depend on these increased rents to cover rising expenses on their end (think property taxes, maintenance, and overall cash flow). Unfortunately, tenants indirectly foot the bill.
Property owners have a different set of expenses to contend with. For those with a fixed-rate mortgage, the monthly payment typically remains consistent. While it’s less common, some choose to go with an adjustable-rate mortgage (ARM). If you fall into the latter category, it’s important to consider that the interest rate can go up without warning, resulting in a higher monthly payment.
Regardless of your mortgage type, those pesky property taxes will likely rise too. Property taxes are based on the assessed value of your property. Determining factors can include size, location, construction type, and so on. If the value goes up - so will your tax bill. On top of that, when the local government decides to make improvements to public schools, roads, parks, etc., the budget typically comes from taxpayer dollars.
Maybe you don’t own a home yet, but plan to in the future. It could be one of your short terms goals or one of your long term goals, but with a potential mortgage payment on the budget planning forefront, it’s easy to overlook additional expenses that come with homeownership. As part of your planning process, try putting aside more money than usual for a set period of time. While it may not be exact, it will improve your ability to figure out how to live a lifestyle with higher expenses and less money available for more frivolous purchases (that add up more than you think). If you are able to adapt, chances are you’ll be more prepared when you finally become a homeowner!
Cars and transportation are other big factors when it comes to monthly expenses. Costs are typically stable over the short-term, however, there are plenty of reasons to think ahead when it comes to owning or leasing some wheels. By taking the proper financial steps, you can be ready for increasing expenses here too.
If you rely on mass transportation to get around, it’s likely you won’t need to think about car payments in the near future (or ever). However, if a car purchase or lease is in the cards for you, start to put aside money every month for a down payment. If possible, aim to make the amount what you anticipate monthly installments to be. Once the down payment is eventually made, you’ll already be in the habit of putting that cash aside, and can then use it towards the monthly payment (remember to keep funds available for insurance, repairs, and gas!)
Now let’s fast-forward a little. If you purchase a car, the joyous day will come when you make that last payment. A nice chunk of change is now freed up for your budget - what will you do with all that dough? Well, think ahead with it, that’s what. No payment now doesn’t mean any payment ever again. Look out for your future self, and continue to put the money aside. This way you’ll be set for any major repairs, or replacing your current vehicle. Who knows - you may need to trade in a perfectly good vehicle for a variety of reasons - which brings me to….
I want to be clear that no matter what I write next, I love my kids and would do anything for them, but man are they budget destroyers!
Whenever a major life event occurs, it can drastically affect your budget and your first child is definitely a major life event. There are doctor’s appointments, food, diapers, wipes, toys, clothes, daycare, and a slew of other expenses that come with having a child. Not taking these expenses into account before the little bundle of joy arrives can leave new parents stressed out not only from, you know, being new parents but for financial reasons as well.
For some reason, many of us don’t stop at one child (again - love my kids). When possible, aim to reuse big-ticket items like clothes, strollers, and furniture to avoid doubling up on some of the expenses. And let’s face it - just when you think you may finally have finances under control for your new family, new wrenches will get thrown into the plan. As kids grow up, so do their expenses…..did you remember to start saving for college?!
Life, in general, gets more expensive due to the rise in the cost of goods and services, otherwise known as inflation. Groceries, clothes, tech, household items - they all get more expensive over time. It doesn’t seem like much, but adding 2-3% on average to the cost of the common items you buy can add up quickly, and your budget will need to adjust accordingly.
Income Not Keeping Up With Expenses
For as easy as your expenses can rise, it’s just as hard for your income to keep up. If you are lucky enough to receive a raise, annual or not, it’s typically in the 2-3% range. On average, that barely keeps up with the previously mentioned inflation rate. That means even if you add $0 in new expenses, you’re breaking even. For any year you don’t receive a raise, you are falling behind by the inflation rate for that year, further straining your current and future budget. There are always the options of picking up a second job using a side hustle for extra income, but both have their limitations.
Getting your finances in order now and creating a budget is an absolute necessity. Motivate yourself to live within your means, as opposed to stretching yourself too thin. By planning for the future financially now, you'll be setting yourself up for both short- and long-term financial success. By doing some long term financial planning now, you'll set yourself up for a financial future with stability and creating a safety net that hopefully allows you to handle any unexpected bumps with a little more ease. When reviewing your finances, focus on the present, but always keep an eye on the future too.
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