By You know where your fixed costs are. What about your other expenditures?
When it comes to budgeting, we see people falling into the same traps over and over again. Now, in theory, well all know what it means to budget: live within your means, spend less than you make, save for emergencies. Sounds simple, right? Then why do so many people, no matter how much money they’re bringing in, have trouble with budgets?
Let me tell you a story about a client who joined us about a year ago. As with every new family we work with, we had her fill out a budget worksheet. She thought she was spending about $4,000 per month, and had dutifully completed the worksheet with her fixed monthly expenses – household bills, mortgage, car payment, monthly subscriptions, savings contributions, etc. However, something in her cash flow didn’t quite add up – there should have been much more leftover based on her reported budget.
At one of her first few meetings, we plugged everything into our eMoney software, and found that she was actually spending around $8,000-$10,000 per month. Upon closer inspection, many of her unreported expenses had gone to charity, friends in need, or other generous endeavors. Now, this is great, we’re all about generosity and giving back! But, we find these kinds of “budget leaks” over and over again, and they’re wreaking havoc on clients’ ability to save long-term.
Most people who walk through our doors are pretty good about knowing what’s coming each month, expense-wise. Many families are also decent about preparing for the non-monthly fixed expenses, like car insurance, dues for various organizations, or the dog’s annual vet visit. But what we often find is that folks are not so good at identifying their day-to-day budget leaks, and like our philanthropic client mentioned above, are surprised to see how much money they’re actually parting with each month.
These unexpected expenses are often aligned with the person’s lifestyle and values. Some find joy in helping others. Some clients love to travel and do so often (even on the cheap, it adds up!). Some people have hobbies that leach money out of their bank accounts, and some simply lead active social lives, enjoying making memories with friends and loved ones. What none of these folks stop to think about, is that the here-and-there costs for those social outings, gas for trips and hobby-related acquisitions add up quickly, often equaling the cost of an emergency (such as new tires or braces for the kids) over the course of a month. They might be prepared for an emergency (you do have an emergency fund, right?), but they’re not prepared for daily budget leaks.
Now, before you throw your hands up and walk away, thinking you’ll never give up your hobby/travel/social life, don’t worry – we’re not telling you to. We always want our client families to enjoy living a life that fits their values AND their budgets. We’re simply encouraging you to add those costs into your budget sheet, and treat it like a fixed expense.
Of course, the hardest part is often determining exactly what your budget leaks are, and our team is happy to sit down and go over your cash flow with you. We specialize in helping client families organize their financial lives, so they can sleep at night, enjoy each day, and work toward a comfortable future.
Article by David Smyth, CLTC, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.