Don’t Break the Budget with Large Expenses
It looks like I may need a new furnace in the near future. The current furnace, and air conditioning for that matter, have done well and lasted over twenty years. Given that the manufacturers estimated 7-10 years, I am very happy. To get an educated opinion on the matter, we have scheduled an appointment with a professional that will evaluate the future of the furnace.
As my wife and I discussed the matter today, she mentioned that our budget for October would be a bust if we counted the entire estimated purchase price of approximately $8,000 in the month. However, I think there is a better way to account for this purchase that makes a lot more sense.
My suggestion to her was to take the price of the furnace divided by the shorter of the estimated life of the furnace, let’s say 600 months, and the estimated remaining time we planned to stay in this house, let’s say 60 months, and use that as a monthly expense in our budget for the specified time period. This is a more business-like way of doing the accounting, but one I think can be applied to personal budgeting.
Why did I choose those time periods?
If we were to use the furnace for its entire life, the value we receive from the furnace would be spread over the life of the furnace - not just the month in which it is purchased. If we move out before the estimated life is over, I want to make sure the entire purchase price is captured. Taking the smaller of these two time periods makes sure you are not underestimating your expenses.
But it won’t match your actual cash flow…
In short, I think that’s ok. Budgeting is not necessarily only meant to make sure you have money in your bank account at the end of the month, although it can be used for that. Instead, we use budgeting to keep ourselves disciplined in our monthly spending. In the example I gave, $8,000 over 60 months, we will have to reduce our monthly spending by $133 over the next 60 months to even out this large expense.
This approach is not for everyone. As I mentioned, for those of you that use budgeting to make sure there is a certain dollar amount left in your checking account at the end of the month to avoid overdraft fees, this will likely require debt to purchase. You would then deduct the monthly payment from your budget.
One thing we didn’t finalize is whether we should have a more efficient air conditioner installed at the same time to cut our cooling costs.
Photo: VentureWeek.com
If you liked this post, make sure you subscribe to my RSS feed or subscribe by email!
Related Posts:
- 50 Easy Tips to Lower Your Healthcare Expenses- 6 Ways to Increase Your Kids’ Financial Intelligence
- Don’t Ask for a Raise or You Could Be Shot
- Tips to Avoid a Bad Mortgage
paidtwice said
am September 24 2007 @ 8:31 am
The idea of keeping track of something I already paid for for the next 60 months makes my head hurt
But you and I use budgets as very different tools and I see where it makes sense for you
Brian said
am September 24 2007 @ 8:53 am
paidtwice: I’ve become a hardcore spreadsheet user, so it’s not too bad to make this happen. The only difference between tracking it myself and taking a loan out for it (which I think most people would do) is that the bank doesn’t send me a reminder every month.
Now to get as good at shopping for groceries as you seem to be!
Stuart said
am September 26 2007 @ 4:02 pm
Is this not a bit like drinking 20 beers in one night, then just telling yourself and other people you drank two a night for the next 10 days? Unless you set up some sort of scheme to pay for the furnace monthly does it really matter what way you decide to cost it out? If you just wiped out the whole monthly budget at the start, you would have the ‘extra’ money in subsequent months, surely thats what emergency funds are for. If you decide to cost it out monthly is that not sort of like being in debt, only to yourself somehow?
Brian said
am September 26 2007 @ 7:57 pm
“…is that not sort of like being in debt, only to yourself somehow?”
Great way to say it - and the answer is yes! I do large cash purchases this way because you must replenish the emergency fund (or wherever you got the cash) in some way. If you just “wiped out the whole monthly budget at the start” then you would be back on the normal spending/savings track the next month and may never replenish your cash reserves.
So, yes, I would say you are indebted to your emergency fund.