Two weeks ago, my storage water heater promptly stopped working for no reason. The wall switch still shows a lit LED, which meant that the problem likely lies with the storage heater itself – but exactly which component that is faulty, there is no idea of knowing. Could be the heating element. Or thermostat?
Made a call to Ariston who promptly arranged their contracted plumber to come by and take a look. A physical check cost me $60. Upon examination, it was determined that the thermostat was spoilt – another $80 to replace it on the spot.
Well, what to do? Bad luck cost us $140 this time. As our home exceeds five years in age, appliances are starting to fail once in a while. Just four months ago, our 40-inch TV started having display issues – another couple of hundred bucks gone there.
First, it was the TV. Then, it was the storage heater. What’s next? I could imagine a big ticket item like the refrigerator or washing machine causing a short-term problem to finances if you’re not careful.
Pre-Emptive vs Reactionary
I tend to think of expense tracking as reactionary in nature. After things happen, then we keep track and analyze how we could have done things differently. Useful? Yes, if we make good use of it. To me, budgeting is like taking it to the next level. Sort of like a pre-emptive strike at what expense I would be incurring in the future.
This is an old snapshot of how my YNAB budgeting app looks like. In addition to budgeting categories which I have catered for on a monthly basis e.g. food, transport etc, I have also created categories for events that occur on an annual basis, or even random in nature.
Even though I may not incur the expense in this month or the next, I know that it is going to happen sooner or later. Therefore, every month, I pre-emptively pre-spend a fixed amount of money into categories that will be expended in future. Once I have given my money a job, it is considered spent.
The green boxes indicate what is the current number of dollars already budgeted for the particular category. For instance, my half year supply of contact lens cost me $108 and I budget exactly $18 monthly for it. Once I have ordered and paid for it later this month, the amount available would be reduced to exactly $0.
For example, I can budget $50 monthly for household repairs and $50 for my income tax. When my storage heater needed a repair, I can dip into my budgeted dollars and spend it without batting an eyelid. Come next year, I can upfront pay for my income taxes in a single transaction.
Kind of like having many money jars, each labeled for a different purpose. Every month, I put money into all the money jars. When the need arises, I dip into the money jars to pay for my expenses.
After years of fine-tuning, my number of categories have expanded to more than 40! If the idea of budgeting is too daunting for you, start with expense tracking – an excellent example here from my15hww who meticulously track his household expenses.
More Than Index Investing
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