Tax Alert: Day 6 - It's slightly cloudy with a chance of rain...

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We've covered a lot. I hope you're beginning to feel the power of the budget. Maybe you're even developing some respect for that six-letter word. You've also realized there is no truth to the lies surrounding budgeting. You've recognized that your life, as you know it, will improve immensely when you implement these principles. We've gone through the ins and outs of inflows and outflows. We talked about assigning every dollar a job. And just yesterday we stressed the importance of the Budget Meeting in your marriage. Did you talk with your spouse about it?

Save for a Rainy Day

Today we hit the Second Rule of Cash Flow: Save for a Rainy Day.

Rule Two can only happen when Rule One is happening. Remember how you're assigning your dollars to different jobs? Well, let's say your $360 car insurance premium is due every six months. That works out to be $60 a month, right? I know, the complexity is going to blow you away, but you'll want to budget $60 into your car insurance category each month. When the sixth month rolls around, guess what your balance will be? $360. You'll cut the check and pay the bill. YOU DON'T FEEL THE BIG BILL.

I'll bet you can remember a few months ago when something big WAS due--maybe your property taxes, HOA dues, or...Christmas. How was it handled? I can't speak for everyone, but based on what I've experienced, if you don't plan for those high points with the bills, you'll be leveled. You were likely barely making it month to month and then a $360 big-kahuna-type bill came down the pipeline. Perhaps you "had to" charge it.

The cycle of being "surprised" by bigger bills, and charging them bit by bit...pretty soon you have $12,000 of credit card debt and no apparent way out.

There is a way out. Acknowledge the fact that some of your money should just sit there until the big bill comes due.

This principle, obvious as it may seem, truly works. It forces you to acknowledge in the "good" months (where nothing big is due) that you inevitably have a rainy day ahead. Instead of having eight good months, and four bad, you're going to have twelve normal months.

Trust me. It's much easier to handle twelve normal months.

What About "Surprises?"

This all appears quite easy when $360 is a fixed payment. But what about something like car repairs? When's the transmission going to fail? When will the air conditioner stop working? When will your grandpa accidentally break the door handle off of your car while trying to get out, which causes you to have to roll down the window and reach for the outside handle whenever you want to get out of the passenger side?

I've digressed.

You're not a statistical outlier. You'll have home, car, and teeth repair surprises.

These surprises are NOT emergencies. You KNOW they're going to happen, just not WHEN. So you guess. It's as easy as that. You don't have the fixed amount, but having something set aside is better than nothing. Your guesses will improve over time.

Think about some rainy days in your life. I've talked about car insurance, Christmas, HOA dues, and property taxes. You may also have club membership dues, self-employment taxes (done quarterly), health insurance premiums, birthdays, anniversaries, relocation, etc. It's basically anything big that is happening that you can estimate and plan for.

I use my software that tracks these balance accumulations for us--but that is not necessary. You could just as easily use real envelopes, or write it on a piece of paper on your fridge. You must track it, or it won't work.

Planning for these big expenses gives you back your sanity and financial peace of mind. I promise you from my own experience that giving every dollar a job (Rule One) will help your money go further, and you'll find you have enough to save while the sun shines, for those rainy days ahead.

Tomorrow we're going to focus on the sport of boxing. Well, sort of.

Action Steps:

List all of your larger, non-monthly expenses (life insurance premiums, property taxes, Christmas, vacations, etc.)

Divide the totals of those expenses by twelve to get your monthly funding requirement.

Warm Regards,