I am figuring out my budget based on your Ideal Budget template. I am not sure where to put insurance. I put renter’s insurance under housing, and auto insurance under transportation, but where do disability, term life, and umbrella insurance go? Or is this way too nerdy a question and I should be doing something else on my day off? Thanks,
Oh, Renee. If playing with numbers on your day off is “nerdy”, then I don’t want to be cool. Then again, I’m 40 and the chances that I’m cool have gone down precipitously.
The Ideal Budget, for those of you not familiar with it, is our go-to answer when people ask us questions like, “How much should I spend on X per month?” It’s been created to be as applicable to as many people as possible. You’ll find the expenses that make up the Ideal Budget constitute the core spending categories for nearly everyone. See for yourself:
Sure, one could argue about how much of your income is allocated to certain categories (especially if you live on a coast), but what is presented is a solid base to start from.
Because the Ideal Budget is intended to be broadly applicable, you’ll notice a few common, and typically significant, expenses aren’t included. Things like:
- Student Loans
- Consumer Debt
“I don’t know anyone who doesn’t pay for at least one of those things each month,” you may be saying. Like I said, the three excluded categories are inarguably commonplace. However, they’re also temporary (yes, even student loans are temporary).
Let’s consider childcare for a minute. Childcare is an expense that many people find themselves paying for 5-6 years (per child). Childcare is not an insignificant cost and can’t be squeezed into the miscellaneous category, so the budget will need to be temporarily adjusted to accommodate it. For the purposes of our example, we’ll say that your monthly childcare expenses consume 10% of your monthly budget. You’ll need to take a percent here and there from other categories in order to fund that expense, otherwise, we end up with a budget spending north of 100% of our income. What happens when you no longer have the childcare expenses? You can then reallocate that money back into their original budget categories. You can do that, but don’t. You’ve lived 5-6 years with your budget adjusted to pay for childcare, so you have the ability to redirect those funds wherever you want without feeling an additional pinch. We suggest you start using that budgeted money to save for your child’s future education expenses. Guess what? Saving the money will make the “savings” piece of the budgeting pie way bigger than it was just months prior. Yet, you’re still not adhering strictly to the “Ideal Budget”, and that’s ok!
Your budget is a personal thing. It will need to be adapted to fit different situations and seasons in your life. For instance, we encourage people to have their home paid off when they reach retirement. Being mortgage-free is going to have a significant effect on the size of your housing budget, and overall budget during retirement. Don’t be afraid to make adjustments as needed or required.
But, what about disability/term/umbrella insurance? Where do those go? Those are all good things, right? Yep, they absolutely are. These types of expenses are exactly what should go into your miscellaneous category. If they add up to more than 3%, then make the adjustments needed to the rest of your budget knowing that you’re doing so for a very good reason. You may also consider shopping your insurance to try and find better rates if you haven’t done it recently.
And that’s it, Renee. Categorize your expenses as best you can. Create new categories if/when your situation requires it. Don’t hesitate to adjust your budget to reflect the good decisions you’re making. And now that you’ve started budgeting, don’t stop.
Damian is the lead Financial Concierge on Your Money Line, the financial help line serving all Pete the Planner® Financial Wellness clients. Damian is a CERTIFIED FINANCIAL PLANNER™ professional and loves answering your money questions. Despite sharing a last name and sense of humor, Damian and Pete are not related.