What Is Your True Monthly Budget?
When we sit down to write a budget, what are we typically doing? We look at what we expect to make and spend in a given month. We outline our monthly bills and what we anticipate our other expenses to be. And yet, we either forget about big unusual things or don't prepare well for others and they end up coming in like Miley on a wrecking ball to destroy our carefully constructed budget. Why does this happen? It often occurs because these "budget busters" aren't part of regular monthly spending, and so they're out of our peripheral view when thinking about lining up monthly inflows and outflows. But they are things we should budget for because either they always happen or they'll happen eventually.
From Surprised to Seen
Our "monthly budget" is, in reality, much bigger than just our monthly bills and expenses. YNAB calls these items that are outside of our usual monthly realm "True Expenses" or otherwise known as "sinking funds", and accounting for them is a core tenet of the YNAB method that helps us gain a better understanding of our financial picture. When deciding what we can and can't afford, it's important to acknowledge and incorporate these things into our regular budget plans for a few reasons:
They are going to happen, so let's not turn a blind eye or hope they'll somehow work out on their own.
Breaking them down into smaller chunks over time will make it easier to accommodate and prepare for, instead of trying to absorb them in the month they happen.
We have greater visibility and a more realistic view of things so we are financially surprised less often and less vulnerable to relying on credit cards to float the money.
Known and Unknown
Let's take a look at the different types of True Expenses and some examples to help you think about how they might apply in your own budget. We can categorize them by considering their predictability as it pertains to their timing and amount, and one way I like to think about them is by utilizing a decision-making framework such as Known Unknowns.
Known Knowns - We know the expense will occur, and we know for what amount.
This could also include knowing the specific cadence of it occurring for even greater predictability. With Known Knowns, we can directly control the impact the expenses have on our budget. These are our easiest True Expenses to plan for, because it's simply dividing the amount needed across the time until it happens. An example of this would be a car insurance policy that renews every six months, or an annual software subscription. You may even be opting for a monthly payment of these things, but could save on the cost if you paid up front! For example, Amazon Prime is currently offered at $140/yr or $15/mo. You save $40 (or 22%) over a year's time frame by going the annual route. Breaking the cost down yourself still has the same effect of "monthly payments" but now you get to take advantage of paid-in-full discounts (and even earning a bit of interest on the money while it waits to get used!). Known-Known True Expenses could also be something that happens at a predictable time for an amount you can control, such as Christmas shopping, birthdays, vacations, or other events. Those don't have associated bill amounts, but we have the ability to set a cap on what we're willing to dedicate to it. And by spreading the total cost out over the year, it enables us to do some early shopping because the category has already been built up even though it's not totally full yet.
Known Unknowns - We know the expense will occur, but we don't know for what amount.
For these, we can assume the expense will occur at some point, or hope it never occurs but want to be prepared for it, but we don't really know how much it will cost or the cost can vary. With Known Unknowns we don't have the same direct control over the impact as we do with Known Knowns, but we can still influence the impact it has on our finances when it occurs by deciding how to prepare for it. These expenses might normally trigger a financial emergency from which you scramble to get money together or charge to a card. And you might be thinking, "Well that's why I have an emergency fund!" but just like we're trying to give every dollar we have a job, I think we can give these "emergency fund" dollars better, more specific sinking-fund jobs and leave the emergencies to things truly unexpected and unaware. Some examples of Known Unknown True Expenses we should be setting money aside for could include:
Car maintenance (wear-and-tear items such as brakes and tires, end-of-life repairs like alternators, and maybe preventative maintenance such as oil changes and fluid flushes although since these are on a schedule they're probably known-knowns)
Home maintenance (same type of things as mentioned above with cars)
Appliances, computers, things that could break and need repair or replacement
Medical visits (maybe the goal is to have your deductible saved up?)
Veterinary visits and services aside from regular checkups
Unknown Unknowns - We don't know about these expenses, and don't know their amount. These are some "lumpy" things we still haven't identified, but once we do encounter them or detect a pattern, we can move them to a more predictable category to smooth them out in the future. What other True Expenses can you think of for your own budget?
A Stash of Cash
What happens now that we have a better view of these things? We spread their cost (or anticipated cost) out over every month instead of just the month they happen. This reduces the stress of ends-meeting for those particular months and lets us understand more fully our total budget, consistent from month-to-month in our planning so when the money is due in real life, we've decoupled needing our income to spike along with the expense. The goal is to smooth out our monthly budget. To fortify, shield us from, and help us absorb the lumps and surprises. What does this end up looking like? Well if the total cost of our monthly bills and expenses is $4000 plus $1200 in December for our family's Christmas shopping, then our monthly budget is really closer to $4100 over the course of a full year. And then picture it: You're ready to shop for Christmas and you've got a whole stash of cash ready to spend. You've made this impending spending bonanza no big deal. What a great feeling! Creating the consistency puts less strain on what we need when the time comes around. And this will also allow us to determine if our budget can handle our new monthly number. If it can't, we can change the plan and our priorities to put us in a better position to succeed, but we know that now - with more options - instead of at crunch time.
Adding this all up can be a revelation as you realize your monthly budget needs are different than what you thought, but now you know and can decide what to do proactively. Preparing for these types of once-in-a-while expenditures is a key way to establish and bolster your day-to-day financial security, keeping you cognizant of what is coming and protected against what could. YNAB is a great tool for visualizing this and keeping things straight so you don't have to remember it all as you look at your bank balance, and as a certified YNAB coach I'm here to help guide you through it all on your budgeting journey.
Contact me to talk about how we can smooth out your budget and stop being on the back foot when it comes to things we could've seen coming!