By Jess McEvoy, CIM, PFP
When we create a personal budget, we usually start with our take-home pay and then subtract expenses. For simplicity’s sake, we lump as much as we can into as few categories as possible. We have categories like mortgage/rent, food, vehicle expenses, entertainment, utilities, gas, and maybe one or two others. This is a budget doomed to failure. Here’s why.
We have annual expenses we don’t take into account. It may not seem like a lot but what about vehicle registration at $85 a year. How about your annual Amazon Prime membership? The premium credit card fee because you like to collect reward points faster? Maybe your annual vet check-up for your pet? Want to keep your Costco membership?
What about those little expenses? Do you budget for speeding tickets, lightbulbs, cleaning supplies, a new computer mouse, a blender that stops working, a new broom, or pillows for your bed? Do you budget for wedding gifts, Christmas, birthdays, anniversaries, a new computer, or tires for your vehicle?
This is the Death by a Thousand Cuts. Every month a ‘small expense’ comes up. We fork out $30 here, $80 there. Before we know it, that ‘extra’ $500 we thought we had is spent. This happens month after month and before we know it, that nice vacation we had planned has arrived and don’t have enough cash to pay for it, so we put it on the credit card and say we will pay it off next month with the ‘extra’ $500 we budgeted for. Rinse and repeat. Now we’re living paycheque to paycheque.
What happens when the big things break down? Your furnace, fence, roof, appliances, or an unexpected vehicle repair happens. Are your finances protected against a major life event like a heart attack, death in the family, or sick family member? These big things kill the budget and typically land people in debt. Now the ‘extra’ money we had goes to a monthly payment. Death by a Thousand Cuts each month and we get further and further behind.
It is important to be aware of where our money is going. If you could take all of your yearly credit card statements, receipts when you pay cash for things, bank statements, and all the other accounting of spending and put it through a spreadsheet that analyzes your real expenditures; we would see where our money truly goes. We would capture the yearly expenses and the ‘one offs’ that always seem to happen. We would analyze the remaining life of our appliances, roof, fence, and other major expenses. We would insure against catastrophic events like a heart attack or prolonged sickness. This would give us an accurate budget.
If we took a look at our Death by a Thousand Cuts, we would start to see our bad habits. You may be spending too much on restaurants, wasting food by throwing out a quarter of what you bought, spending too much on a bad habit like smoking or a shoe addiction. Maybe we are spending too much on housing, on vehicles, or on vacations?
Take an honest look at your expenses over a year. Find your bad habits and start to correct them. Keep more of what you earn and remember: It’s not what you make, it’s what you keep.