October Financial Fitness Challenge--Tune In to Spending Triggers
Just when you think you have a handle on your spending, you can find yourself blindsided by a spending binge. And I'm not talking about the unexpected broken tooth or kaput water heater. Some situations trigger surprise spending. Once you think about these events in advance, you're far less likely to be caught off guard.
I got thinking about this recently when a friend retired. This was a long-anticipated happy occasion. Charlie had worked in a physically demanding job for 34 years and was more than ready to slow down and enjoy the fruits of decades of labor.
Reward turns sour
Not unlike other new retirees, Charlie planned to buy a tangible reward that he now would have time to enjoy—for him it was a sauna. What a treat! He'd put it into a corner of his large garage. In his working years, he'd turned for electrical needs to a handy co-worker. The price was right, but for the sauna—his special indulgence—he wanted to make sure everything was done correctly. He called in a licensed electrician.
Good call. But as it turns out, a costly one.
The electrician discovered, first, that the electrical service needed an upgrade to handle the sauna. But he also found that years of previous amateur electrical work were not up to code, to the point of threatening safety. The solution? A compete overhaul of the electrical service.
Charlie is relieved to know that the work is being done properly, but this became a significant surprise expense—triggered by one soberly planned and budgeted expense.
For years, people approaching retirement have counted on lower expenses once they stop working. You've likely seen suggestions that you'll be spending about 60% to 70% of your preretirement income once you hang up your work hat.
Lots of events trigger surprise, or at least unaccounted for, payouts.
It turns out that's not such a good guideline: Consumer Reports says "new retirees often find that their expenses rise at first, as they indulge pent-up fantasies such as travel and redecorating." The editors suggest planning to spend as much as 100% of your preretirement expenses once you retire. If you actually spend less, you'll have no worries.
"Watch out" expenses
There are lots of planned expenses that trigger surprise, or at least unaccounted for, payouts. For example, I seriously underestimated the true cost of buying a CD player about 20 years ago. I researched it for sound quality and price and chose a model I thought would be a good buy. It was; I still use it and enjoy it every time I do.
It also was perhaps the single most expensive thing, after houses and cars, I ever bought. Plan A had been to keep using the old audio cassettes I'd had for many years. Plan B turned out to be spending a small fortune buying replacement CDs as well as new CDs, especially in the months right after I got the player.
Today's parallel might be a Kindle, Nook, or other e-reader. Once you decide to buy the device, the expense has just begun: You'll potentially be spending hundreds of dollars more as you feed the device with reading material. The same can be true for an iPod or MP3 player—those downloads add up.
And that may be fine. The point is just to look a bit down the road and anticipate how one expense might trigger others. If it fits in your budget and doesn't jeopardize other financial goals, you're good to go. As we said last month, all money is for spending—the only question is when.
If it fits in your budget and doesn't jeopardize other financial goals, you're good to go.
Financial Fitness Challenge
The people at your credit union bring you this Web site and other tools, such as personal finance coaching, to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter often. Remember to register for the Financial Fitness Challenge.
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