5 Reasons Your Budget is Broken
Practical ways to not waste your money.
We’re all receiving our W-2s and 1099s this time of year, accounting for each productive hour we had in 2022. Most of us tally up the figures and then wonder “where in the world did all this money go?”. A case of curiosity takes hold, then you start your own miniature investigative accounting enterprise to get to the bottom of the matter, to the chagrin of your significant other. There’s a reason why Q1 is usually a banner quarter for budgeting software sales. Usually, this investigation hits a wall because the only thing less fun than accounting is implementing austere accounting solutions.
One unique thing about my profession is that people open up to me about their finances in ways that they don’t with others. This gives me a perspective that most do not have, albeit anecdotal in nature. Any given year, I am involved in over 300 unique financial plans and every one of them is underpinned by a budget. Approximately 90% of people in my experience underestimate their monthly spending and most miss by a lot. Consequently, I’ve developed a healthy skepticism of consumer estimates, and a knack for identifying common money pits. More importantly, I know what works effectively for plugging holes. Sadly, it involves more than watching a catchy TikTok video.
Reason One: Keeping up with HGTV
Coming in at number one by a country mile are home improvement “investments”. Spending on home improvement projects are often justified as net-worth neutral projects at best, and investments at worst. I hate to burst your bubble, but that $20,000 you just dropped on your kitchen remodel was not an investment. Investments, when they pan out, typically offer positive future cash flows or a promise of cash flows at some point in the future. Unless you are remodeling a rental property or a flip, it is unlikely that your home improvements will be anything but an expense. This is not to suggest that you should not enhance your nest but go into the project with a plan and both eyes open.
First, assess whether the project is necessary. In other words, do you need this thing to be done to keep your living space safe to live in? If yes, then the decision is obvious. If no, the next question is “do I have the money?”. I cannot overstate how important it is to avoid incurring debt on unnecessary expenses. If you do not have the money for the project, plan for it over time through cash flow deferrals. If you do have the funds, or once you do, then measure this expenditure against a longer term investment to test your commitment to the quality of life improvement. Would you be better off doing something like maxing out your Roth contributions or investing in advancing education? If the home improvement decision passes this simple screen, then it gets the green light.
So, now that we have made a sound financial decision, here are some tips to save on the project. Obviously, DIY everything you know how to do. You may even surprise yourself how much you can figure out on your own with resources like YouTube. Once you decide you’re in over your head, consider being your own contractor which entails selecting and hiring the skilled tradesmen required for the job (e.g. plumber, electrician). Next, purchase whatever materials you can on your own to reduce markups. This also gives you the opportunity to scope out awesome discount home improvement retailers such as Home Emporium or Pease Warehouse, which are in the Cincinnati area where I live. My wife and I were able to install ¾ inch oak flooring throughout our house for a fourth of the cost simply by going DIY and purchasing the materials from a discount retailer. The key takeaway here is that convenience is costly.
Reason Two: Medical Expenses
This category is either high on the list or low on the list, depending on the household. The state of healthcare in the US today is feast or famine in terms of quality of health insurance coverage. If you are fortunate enough to be included in a comprehensive group healthcare plan subsidized by either the government (Medicare) or your employer, then this is likely not a pain point in your budget. For a growing number of people, however, healthcare is nearly as much as housing. Unfortunately, my household falls in the later category so this one hits home for me.
The prospect of a major health event looms over everyone’s head so going uninsured is a high-risk option I cannot advise. If piggy backing on a cushy group health plan isn’t an option for you, then I can suggest three other potential options. First, a healthcare.gov policy may work if your household income is low enough to qualify for the subsidies necessary to make these plans realistically affordable. Going here to price out your options should be step number one. If, like me, these plans are not practical choices for you, then I can suggest looking into alternatives such as an indemnity plan (I have one through United Healthcare) or a shared cost healthcare network. Unfortunately, these alternatives do not qualify you to make HSA contributions, which are highly recommended for people with high-deductible plans (deductible must be over $1,500 for single coverage or $3,000 for family). The substantially lowers premiums of these alternatives often outweigh the opportunity costs.
As consumers have been pushed more and more into higher deductible plans, or forced out of their plans entirely, not all is lost. Healthcare providers have become increasingly familiar with out of pocket patients and offer aggressive discounts for those paying up front. Without getting too personal, my wife and I have paid for three medical procedures over the past 3 years completely out of pocket. We paid less than the total amount of premiums we would have paid into a comprehensive healthcare policy. Always negotiate your healthcare bills, even if you have a good healthcare policy! Every bill you receive should be negotiated with the healthcare provider’s billing department. A best practice, when possible, is to negotiate a service fee ahead of the procedure.
Reason Three: Your Ride
Who doesn’t like a nice car? We use it nearly every day, it’s a status symbol, a reflection of our personality, and we don’t want it to be a source of headaches. Opinions on this topic range from Dave Ramey’s “3,000 lbs of stupid” in your driveway to the “leasing is a deductible expense” business owner. My opinion on the matter is more nuanced and I feel your personal situation should determine the right fit. Know, however, that your auto expenses represent a significant line item on your budget, and you would do well to minimize them if wealth building is a priority for you.
Buying new vs used is not that relevant and is an overplayed argument. With perfect information, you would simply buy the car that pulls the least amount of future cashflows out of your pocket irrespective of its source. Buying new with a warranty is not much different than pre-paying the repair expenses for a used car, so I can understand why this option is attractive. Rather, take a comprehensive view and consider things like expected reliability, fuel type, tire replacement costs, insurance costs and utility fit for your lifestyle. The price difference between a lightly used vehicle and a new car can be completely negated by replacement tire cost differences alone.
Now comes the big question: do you finance or pay cash? Well, this depends on your financial situation. A twenty-year-old fresh out of school probably doesn’t have $25k in their back pocket, unless they were unusually thrifty. Similarly, an empty nester in the prime of their earnings years may have some excess reserves. Financing a car purchase makes sense in two scenarios: A) there are literally no other options outside of Uber, or B) you can secure financing at a rate lower than your cash yield without compromising future cash flows. Outside of these two scenarios, you should pay cash. Furthermore, as a best practice, you should be making car payments even when you do not have to. You will need to replace your car eventually so put a car payment in your budget directed toward a savings account. This also means you should double up on payments if you have one already, which means you should buy half the car you want the first round. Lastly, if financing, shop the rate before going to the dealer.
Reason 4: Food & Grocery
2022 was a whopper year for this category. On average, food prices inflated 9.9% annually according to USDA.gov. For the average family that spends $300 per week on groceries, this amounts to $1,500 dollars more per year! Although food and & grocery represents a large portion of household budgets, it’s one of the more difficult areas to apply thrift. For one, eating beans and rice isn’t realistic nor would many dietitians advise it, not to mention its unwanted side effects. I was once told by a health coach, “don’t ask why good food is so expensive, ask why bad food is so cheap”. Secondly, food plays an important role in how we commune with others we love and care about, and nobody wants to join you for a massive bowl of 99 cent ramen noodles.
Liberty Farm Market, Liberty Township, OH
Saving money on food is more about how we buy and consume than what we consume. The USDA estimates that Americans waste 30 – 40% of the food we purchase every year, which is astounding. Furthermore, most households eat on-demand, reactionary meals which are bad for the budget and waistline. Planning at least one meal a day ahead of time will help to reduce food and monetary waste. If you’re a superstar, you can plan meals a whole week ahead of time! I will admit, I need to improve in this area a bit, especially around lunches. Another way to cut down on waste, improve your health and deepen your connection to your food source is to grow a garden and/or develop a relationship with a local farmers market. My wife and I began gardening about three years ago, and I’ll admit it’s a work in progress, but we do get meaningful production. Additionally, I recently sourced a 100% grass fed cow from my local farmers market which saves us money but also provides food security.
Reason 5: Shopping
It is in our nature to improve upon our yesterday, and what better way to do it than to buy a shinny new thing we didn’t have before. Worldwide, consumerism has taken hold of the individual psyche as retail therapy becomes the choice medicine for the mundane. Retailers have become masters at commercialized human fishing with retailers like Amazon even predicting what you want before you even know you want it. I find Amazon’s approach to be a bit creepy for me, but I turn into Aladdin’s Abu in the Cave of Wonders when I’m in Microcenter’s checkout isle. And Costco? Don’t even get me started on Costco.
Shopping is usually the thing that kills a budget by a thousand slices. As with most things we buy, if it is convenient, it is probably priced at a premium. Convenience is usually your wallet’s enemy because it short circuits the higher brain function responsible for reason. Removing convenience can help reduce spending as it forces you to think about each purchase. If that widget isn’t worth the time to input your card information, it’s simply not worth your money. Several “life hacks” I recommend for the spendthrifts out there are: 1) delete your card information from retailer/service provider websites (yes, this includes Amazon) and keep it off which also protects it from information hacks, 2) make second hand stores your first stop before the big box retailers, 3) don’t be afraid to haggle to the point of walking away, and 4) don’t buy anything on your smartphone. The ultimate method for bringing your shopping under control is to use the cash envelope system, but this requires an unrealistic level of discipline to be applied as a “practical” solution for most people. Notice that all these methods involve removing convenience.
There you have it. My top five reasons most budgets spin out of control. None of my proposed solutions are easy to implement but they can and do work. While this article was longer than I intended, it’s far from a comprehensive list.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.