Budgeting for Wear and Tear
A client reminded me of some good budgeting advice this morning; I thought I’d pass his comments along. As homes age, it is inevitable that appliances, HVAC units and even flooring, roofing, windows and cement may need to be replaced. While it might not come to mind when thinking about living expenses, replacements are a very predictable expense and should be planned for.
Start by making a list of everything that might need replacing in the future. In addition to house-related replacements, you might also want to include computers and cars on this list.
For every item, estimate how much the item would cost to replace and the useful life left in yours.
If I anticipate needing to buy a $3000 refrigerator in 4 years, I’d project its cost in the future using an inflation rate, and divide that amount by 48 months (I got $67). That’s how much I should put in escrow each month in anticipation of my fridge breaking. Do the same calculation with the list of replaceable items, and soon you’ll have a fairly significant amount going into an account every month in anticipation of items breaking or wearing out.
I can provide a spreadsheet to help you calculate your own “replacement” amount, just give me a call.
If you are setting aside money in an investment account or interest-bearing account, you can discount how much you need to save by the expected returns.
Some might balk at putting that much money aside, but the same people probably wouldn't think twice about getting a loan or using credit cards to pay for the same items over time, resulting in a similar or likely higher monthly payment.
This advice is helpful at any life stage, but is particularly useful in times of tight or fixed incomes.
The client mentioned earlier has recently retired. Prior to retirement he did significant work monitoring spending and projecting retirement expenses. Post-retirement has looked much like he expected, with one exception. Replacements. His advice? Remember to plan for this inevitable expense.