Financial planning isn’t always easy. Even for those of us who have been doing it for decades, estimating income or costs can be difficult and we can still find ourselves being caught off guard at times.
Eventually, you just kind of come to the conclusion that you’re likely going to be over or under on the majority of budget estimates and forecasts. Whether it’s by a little or a lot can be critical though. And making the most educated guesses and factoring a little wiggle room into such estimates can help smooth out the bumps when they do arrive.
Understanding additional draws on income
Part of properly planning for budget road bumps entails truly understanding our income and how much of that income actually makes its way into our coffers. There is often a bit difference in what we earn versus how much money we take home. After things like employment taxes, benefit costs, state and federal income tax, retirement plan contributions, and similar deductions, a regular paycheck amount can lose much of its luster as well as much of its buying power. We work to fully understand how much of our incomes we can actually put toward expenses by gauging post-deduction income. In turn, this allows us to better plan how to use this money and get a more accurate reading on how much money is available to us for regular expenses.
Accounting for unexpected expenses
Unexpected costs can sometimes make or break a budget. Tracking expenses over time allows for more accurate estimates and help keep surprises to a minimum. Our family has been tracking our costs for years, and we have a pretty good idea of what expenses will arrive and when. However, even then, unexpected expenses can still crop up.
Unexpected health costs, vehicle and home repairs, kid costs, and more can arrive without much warning and can put pressure on budget restraints.
Battling the over/under
To combat the budget over/under, we do several things. First off, we have built an emergency fund. This $5,000 cushion acts as the cash reserve for any major expenses that arrive unexpectedly and that could put us over budget.
However, to this reserve, we add an additional tool that helps us combat the financial over/under. To each monthly budget breakdown, we add in a smaller reserve amount of about $200. This helps us catch those unexpected costs that come along and can break a budget. This smaller reserve also helps keep us from constantly dipping into our true emergency fund for more minor expenses. And if we don’t use all of our monthly reserve, we can carry it over to the next month, building a rolling reserve that increases in amount and that can fund more major expenses when they do arise.
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The author is not a licensed financial professional. This article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.