When it comes to budgeting, you need to be prepared for the worst to happen. Of course, you always hope that the best will happen, but you still need to be prepared for the worst. This applies to any aspect of your budget which requires you to save money such as an emergency fund, sinking funds, or savings funds. A sinking fund is like a miniature savings account for less-than-monthly expenses. You might have a sinking fund to pay for things like insurance or taxes.
When I say that you need to be prepared for the worst to happen, what I mean is that you need to overestimate how much something will cost and underestimate your income. For example, let’s say your typical take home pay for a month is $3,100. When you are budgeting, it would be wise to budget with $3,000 instead of $3,100. This way, if for one reason or another your pay for the month isn’t exactly $3,100, then your budget has a little bit of wiggle room so that you aren’t scrambling to figure out where you’re going to come up with the extra $30 that you need to cover this month’s cell phone bill. On months that you do make $3,100, then it’s like you are giving yourself a little bonus that can be spent on whatever you want (if your debt is paid off, otherwise your little bonus needs to go toward your debt).
Okay, now let’s say you’re saving money to do a kitchen remodel in your house. You’ve researched and asked around for estimates and you’ve determined that it will cost somewhere between $8,000 and $12,000 to get the job done. If it were my budget, I would save at least $15,000 for this kitchen remodel. This is what I mean when I say that you need to overestimate how much something will cost. There is always a chance, especially with home remodels, that the actual cost of something will be higher than what you budgeted for. Why run the risk of having to go into debt for something like a house remodel or buying a car or even a vacation? Why not just eliminate that debt risk entirely and have enough money to pay cash for anything that might be over your budget? That’s not to say, though, that you should spend the extra money that you save! It is simply a buffer for the possibility that whatever you’re saving for could end up costing a bit more than anticipated. Just like with underestimating your income, if you don’t spend all of the money that you saved for a large purchase or expense, then you get a little bonus! In the kitchen example, if you save the $15,000 but it only costs $10,000 after everything is said and done, you just gave yourself a $5,000 bonus. Overestimate your expenses and underestimate your income. Prepare for the worst, hope for the best.
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