How to Create a Budget

Broken fenceI don’t have a category in my budget for “Fence Repair”, but I need $3000 to fix the fence.  Here in California this winter we are having the El Nino as predicted.  (Although today it is a Santa Ana, which means 80 degrees and no clouds.)  Last week we had some very windy weather.  So windy in fact, the fence between our house and our neighbor’s blew over.  It actually broke the cement wall holding the metal brackets which in turn attach the wood fence posts to the stucco base.  Since I have to get the wall repaired, and the fence replaced, it is costly.  There is a wrong and a right way to budget for this.

The way most people create a budget is to look back 3 to 6 months and use the average for each category.  For example, I eat out often and can get an estimate for how much I spend each month by totaling my past three months of eating out and dividing by 3.  That would include Christmas time which is unusual activity, but I would have an estimate for my budget.  I can do this for all the categories I am interested in following.  One of these categories is home maintenance which includes items like fence repair.

This way of budgeting has a flaw which becomes obvious when I realize that I actually have to produce the money to cover the cost of replacing the fence.  At no point in the last 3 to 6 months have I had to do any fence repairs.  I have not needed to do close to three-thousand dollars of house maintenance per month.  Therefore, using my look back budgeting method, I have not budgeted enough money for the fence repair.  The repair costs have hit me as a total shock and I don’t have the money for them.  How should I have handled the budgeting for such issues?

A better way to produce a budget is to use percentages rather than a past average.  Instead of looking back in time to see what I usually spend for home maintenance, I should use an estimate of 2% of the house value for an annual budget.  If my house is worth $500,000 then, I should put away and prepare to spend $10,000 per year ($833 per month) on maintaining the home.  Most months I will spend less than $833 and other months you will spend a lot more than the $833 per month.  It is okay to have this money sitting in an account that isn’t earning a lot of interest but that I can tap into when I need it.  By putting away enough money each month, even when I haven’t needed to use it for a while, I will never run into the problem of not having enough money to cover a necessary expense.  Not having the money leads me down a path to desperate actions such as over using credit cards.

Let me know your budgeting ideas and thoughts via Twitter: @iammrmarshall.

 

How to Create a Budget