A Deep Dive into Household Budgeting - Part One
Hope for the Best, Plan for the Worst
You’ve heard the saying, “When it rains, it pours.” It seems especially true when it comes to your house. An issue pops up, and then it's one thing after another. It’s not a matter of if you'll need to replace something at home, but when. And when that time comes, I want you to be prepared. My former boss would say, and I've mentioned it before, "Proper planning prevents poor performance." See, Dave, I did pay attention.
One thing that I’ve become a huge fan of is splitting up bills by pay period. I talked about it a little bit in this post, but you can take it a step further and apply this concept to purchases or other savings. Let’s say you move into a new home and want to replace the refrigerator. I don’t know about you, but I don’t always have several thousand dollars just hanging out in my checking account. I prefer to plan for those kinds of purchases. Of course, sometimes things just go wrong, and you don’t have the luxury of planning for an expense. I will talk more about that a bit later.
Anyway, in this example, you know the fridge works, but you don’t love how it looks. Instead, you want the $3,500.00 Samsung touch-screen with all the bells and whistles. It’s not a need, but you want it, and buying it won’t deplete your savings (as long as you’re properly planned), so you decide to splurge. In a two-income household, you can set aside $67.31 from each pay to have enough cash for your fancy new fridge in just one year. If you can wait 18 months instead, you will need to set aside just $44.87 from each pay. Plus, you’ll have the benefit of tracking sales, which means a lower price tag for you. See, patience really does pay off.
I used this approach when we moved to our new house. I knew that I wanted a specific gas range and decided to start saving ahead of our move. By the time we finally moved into our home, I was able to order my new one within days. Seriously, guys, that old range was tragic.
What if you’re suddenly facing an emergency and you need to replace something at home? Maybe your HVAC unit conks out on you in the middle of summer. That’s what happened to us this past year (side note, home-ownership sure isn’t always what it’s cracked up to be. :) ) Thankfully, we followed a co-worker's great advice and had already had a home warranty in place, so the repairs were covered. We certainly were not prepared to shell out $5,000.00 for a replacement unit. If you don’t have a home warranty, I highly recommend purchasing one.
Your emergency fund should be kept separate for true emergencies. Let’s say that you haven’t purchased a home warranty yet, but you need to replace an appliance. Keep in mind that this would not be considered an emergency unless the appliance is not working. Even then, if your dishwasher goes on the fritz, that's still not an emergency. Sure, your hands may look like prunes, but unless you work as a hand model, it's not the end of the world. A part of home-ownership (really, part of life), should be to save for those unexpected events that come up. This might even be a good way to use that rebate you scored from using our HomeAdvantage program (hint hint).
You might be asking yourself what constitutes an emergency? Emergencies pop up unexpectedly and need to be resolved quickly. When faced with a true emergency, turn to your emergency savings or, if the amount you need is greater than what you have on hand, find an affordable loan to help pay for your expenses. After you've recovered, you can start rebuilding your emergency cash.
If you plan to stay in your home for any length of time, you will want to plan on replacing the following household items:
Kitchen appliances
Washer and dryer
HVAC unit
Water heater
Roof
This doesn’t even take into consideration the cost of repairing or replacing furnishings, paint, cracked drywall, flooring, plumbing, landscaping, or routine maintenance.
Do you have kids? If so, you’ll definitely need to cover extra costs. I don’t know about your kids, but mine have done a number on my walls and carpets. Just recently, my youngest flushed a My Little Pony down the toilet – the fun never ends. Even if you don't have young kids or pets leaving their mark (see what I did there?) on your home, you’ll still have costs to cover.
Your Budget
If you're feeling overwhelmed, don't be! The good news is that most of these things won't need to be replaced all at once. You can add a line item or two into your budget to plan for these expenses. Yes, there's that word again - budget. One can never underestimate the power of a household budget. If you need an example of what a budget should look like, check this one out.
I’ll talk more about Household Budgeting in Part Two, but here are some points to remember. Your budget can be as detailed as you want. If it seems like too much to tackle, start slowly. Listing your recurring expenses and household income is a great starting point. You can then delve into specific financial goals and expenses as you have time. The ultimate goal is to anticipate potential expenses so that you aren’t caught off guard. This will lead to a more effective use of your funds and an improved ability to save.
You did it! You made it to the end of the post. Did you learn anything? Did I leave anything out? Please let me know in the comments or email me!
Krista Kyte is a personal finance blogger and personal banker with over 17 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.
