We're extremely busy this week, wrapping up client work on extended tax returns (which have been due, regardless of the current status of the government), but I still wanted to get this Note out to you.
Because my current series about lying to ourselves, and the earlier one on money and values, have been sparking some wonderful conversations and replies from among our clients and contacts. I'm so grateful they have, because my goal in these Notes is to get my friends to be thinking about what matters most in their life.
Because money is simply a means to an end ... not an end unto itself.
This truth is an essential underpinning to what we do with families here at Mike's Team ... coming up with a coherent strategy for managing our financial lives is much more than simply avoiding federal and state taxes, maximizing tax credits or, even, maximizing material wealth.
In fact, families are increasingly seeking us out as a firm who can help design and plan into the future for things beyond simple tax avoidance. And for this, I'm grateful.
BUT. Surprises still come -- and often they come in forms that are just no fun. And being financially prepared for them sure makes things better! Here, then, is how you can prepare for just these kinds of surprises...
Michael Kessler's
"Real World" Personal Strategy Note
Planning for Unexpected Budget Items For Every Family
"When you reach the end of your rope, tie a knot in it and hang on." - Thomas Jefferson (apocryphal)
Many budgets are doomed to failure because of the challenge of planning for unplanned spending. Here are some of the items that it would be extremely important to take into account, if you want to wisely steward your family's budget.
Unknown unknowns
None of us can anticipate all our expenses. Every stage of life brings a whole new set. Perhaps extensive study and research could help you prepare. But it is easier simply to budget 10% for unknown unknowns.
The first question I usually get asked regarding this category is "Like what?" The truth is that even after identifying every expense you can think of, there will still be significant new expenses that may push you toward deficit spending. But every surprise expense is an opportunity to anticipate and plan for that expense in the future.
Insurance deductibles
Review the insurance coverage for your car and home. A deductible and perhaps a 20% copay often apply. Out-of-pocket expenses could run several thousand dollars. It is more important to limit the maximum expense than to make sure the deductible is low. Budget for the deductible and copay expenses.
Car repairs and replacement
Your car won't last forever. It will need major repair at some point and ultimately replacement. Decide how much you are willing to spend for the lifestyle you want, and then budget for it. Don't buy a new $30,000 car and think you won't have any car expenses for the next five years. Even if you plan on driving your new car for the next decade, you have to start budgeting for repairs and your next new car now.
Whatever you pay for your car, new or used, start budgeting to purchase another car in five years. Prices will be higher in the future, but maybe you can stretch the time to seven years so it will all work out.
House repairs
Owning a home and surprise expenses are practically synonymous. The roof might leak. The plumbing could need replacing. A tree may need to be taken down before it falls. The heating or cooling system could need repairs. The carpet will need to be replaced.
Set aside at least 1% of the value of your house for repairs, not enhancements, each year. If you have an older home, increase the minimum to at least 2% of its value.
Emergency travel
Another unexpected category is emergency travel. Family illnesses, weddings or funerals impose themselves on a family's budget with some regularity. Sometimes even family vacations, graduations or other gatherings can strain finances. If you are both of humble means and have a large extended family, your budget could break under the strain. These are not easy decisions.
Here are some alternatives to help you cope. Perhaps you could send a letter to be read or a videotape. Maybe not everyone in the family has to attend. Consider sending a representative. Ask for help with travel or accommodations. I know that family expectations can seem unreasonable, but speaking the truth in love is always a good response.
Avoid sacrificing or jeopardizing the finances of your family simply to attend the birth of another family or a distant wedding. If you are rich in both time and resources, that circle can include a plethora of friends and family. But the rest of us need to be on a more modest plan.
No budget can anticipate every major expense. Life serves up surprises with some regularity. Putting a healthy margin in our daily living expenses gives us the stored resources to weather these major bills, and then to better plan for them going forward.
Last of all, for all of these and other surprises, we're in your corner...
Warmly,
Michael Kessler
(516) 449-2852
