Budgeting 101 – Part 4 of 5
The following article by Robert W. Powell, CPA CA CIRP LIT, was published in the February 2017 issue of the District News. In Part 3 of this series, I discussed annual expenses. In this Part 4, I am going to deal with lumpy expenses.
Lumpy expenses, as I call them, are expenses that we know (or should know) are coming down the track and will have to be incurred but only happen once in a lifetime or only once every couple, few, 5, 10 or 15 years (or so). Examples of these types of expenses include new tires for your car, helping your kids fund their post-secondary education, children’s weddings, significant dental or other medical procedures that are not covered by insurance, or significant home expenses (roof, windows, siding, septic, well).
These types of lumpy expenses can cause significant stress if you have not prepared for them. Yes, it would be ideal to save all the required money in advance so that it is there when needed. But, this is not always realistic. If you can’t save enough in advance, you may need to delay the expense (if you can) or arrange for credit to cover the part that you can’t save enough for. If you are going to need credit, you may need to start working on paying down existing credit to make some room or work at improving your credit score to help you qualify for credit.
Also, you may need to start managing expectations lower. For example, kids may expect to be able to go away to University or College but this may be too costly. Can they attend University or College in your community and live at home? That would save a lot. The kids may also qualify for student loans and this could help fund the post-secondary education. You could then help them pay the student loan and this would stretch the funding period for this expense over an even longer period of time making it more manageable. Another area where expectation management is required (start early) is wedding expenses. Set a budget you can handle, figure out how you are going to fund it and stick to the budget and funding plan.
Goal expenses should also be managed if you have room for them in your budget after required monthly, annual and lumpy expenses are covered. A goal expense could be taking a cruise or other vacation, buying a recreation property etc. These expenses tend to be purely discretionary in that they are not required in order to maintain you and your family. Unfortunately, I see many people finance their goals (lifestyle) and take money out of their budgets to the point that they do not have enough money to cover the required monthly, annual and lumpy expenses. Sometimes these are impulse purchases and, while providing some immediate gratification, can actually have severe negative consequences for your finances.
Dealing with lumpy expenses requires planning, expectation management and being realistic about what lifestyle you can afford.
Powell Associates Ltd. is a licensed insolvency trustee focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses. We offer free consultations to review your personal financial situation and practical debt resolution options. Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth - it's your choice.
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