The Six Reasons We Spend Money – part 5

Today I’m continuing the mini series on the six different types of expenses.

If you missed the first four you will find these using the links below.

  1. Weekly Expenses
  2. Non-Weekly Repeating Predictable Expenses
  3. Product Purchases
  4. Repairing Items That Support Your Life

Today we look at number five.

5. Replacing Items That Support Your Life.

 White Goods, Motor Vehicles, Furniture, Computer and any other items you rely on in living your life. This would also include replacing items that you have just for fun if you can afford to include them.

 Where to keep this money

 This money can be kept with your bills money if you have a Simply Budgets plan that combines them but identifies within your balance what the breakdown of funds is between the different areas. E.g. A balance of $800 might be made up of $500 for Regular Expense type bills and $300 for Replacement of Items (Long Term Expenses). If you have a mortgage offset account it might be to your advantage to combine these funds and store in the offset account so you can save interest on your mortgage.

 On the other hand you may decide to separate this money into a high interest bearing account that you can regularly add funds to. Withdrawals are few and far between so you should be able to earn some decent interest.

 How to manage this money

 You will never be able to guess when your Fridge, Washing Machine, Television Set, Computer, Car and other items in this category will become unserviceable and need to be replaced.

The best strategy is to nominate a date when you want to have funds available to replace each of them and then if they are still going strong you have options.

Maybe you could replace them with new items and still have something of value to sell to someone looking for an older but still functional item. When you think about it, it makes no sense to wait for these items to be ready to become landfill and worth nothing before you replace them (unless you just love them so much and hope they last forever)!

 One thing that is really important to understand about this type of expense is best demonstrated using a fridge as an example.

 A $1000 new fridge that you plan to replace in 10 years will take $2 a week to replace if you put money aside each week from the day you purchase it. If you wait till it is 5years old before starting to put money aside it will cost you $4 a week to reach that same target. If you wait till it is 9yrs old it will require $20 a week! A year later it may cost you $1,000 in one hit if it dies. You will regret not having done something about it sooner if that happens!

 I.e. The sooner you include this group of expenses into your plan the less you will have to commit each week! It’s just simple mathematics.

Consider this:-

If you were just starting out, newly married and lucky enough to have everything brand new, taking care of this group of expenses would require the absolute minimum amount per week because of how long it would be before anything needed to be replaced.

However, 7 years down the track when things start to need replacing and no money has been allocated, you only have to add to the mix a houseful of kids and one income, a busted washing machine, a dodgy fridge and a crook lawn mower and it’s easy to see how relationships get under a lot of pressure and too often end in disaster.

Getting this right saves marriages!