By Clark Troy
As the years have flowed on inexorably and ever more speedily, I have realized there are financial seasons to the year. Autumn is the time for financial aid applications, spring for taxes. I save time and labor by using the former to get organized for the latter.
Expenses also vary somewhat predictably by season. In summer there is vacation and in winter the different faiths use various holidays as excuses to shower loved ones with presents, which rarely come for free. Some people also take vacations in winter, some during spring break. Some families get hammered with fall sports and other school activity travel costs in one season, the other, or in all of them.
Until recently I had lumps in my financial year when premiums on my home and auto insurance and also life insurance policies came due, in August and November, respectively. They weren’t bone-crushing expenses, but they weren’t altogether trivial either and I had to make sure I had money in the right place to pay them. They were a bit of a nuisance. So this past year, I decided to convert them to monthly expenses, a privilege the insurers were happy to extend to me for a small fee to cover transaction and administrative costs (though they, of course, quietly delight at the regular revenue streams they acquired when I did so).
Many aspects of most people’s financial lives are already set up so that things occur on a seemingly natural monthly schedule: salary, withholding of taxes and contributions to retirement and other benefit programs (e.g., health insurance, HSAs, FSAs), mortgage and other loan payments, the escrowing of insurance and taxes together with mortgage payments, etc. These combine into the steady financial drumbeat of our lives.
Many therefore relish and delight in opportunities to splurge on items and experiences large and small which break up the perceived monotony of their lives: a somewhat lavish vacation; a fancy meal; an impulse purchase in the checkout line or while walking through the store to get to the milk or the underwear you really needed; some gewgaw Amazon suggested. We often see these purchases as instances of freedom and autonomy which are afforded us by the magic of a slim piece of plastic in our wallets. In fact, we are often being driven by the ethereal charms of memes like YOLO (“you only live once”), FOMO (“fear of missing out”) and that broad catch-all “the experience economy,” which tell us that people prefer living life to possessing things and accord this preference a vague moral superiority over crass materialism. All of this, however, was quickly superseded by a desire for durable goods when the pandemic took hold. For one reason or another, we get carried away, then are surprised when the credit card bill comes.
Having a process and normalizing expenditures to as great an extent as possible can help us resist the siren songs of YOLO and FOMO. Yes, we need to experience things and our kids do too, but if we blindly steal from the future to finance the present it becomes difficult to be present in the experienced moment.
There are also truly irregular expenses. The HVAC unit, refrigerator, tooth, car or pet that unexpectedly needs replacing or fixing. While each of these has an expected usable lifetime and all can be somewhat managed by preventative maintenance and care or externalized through insurance and warranties of varying cost effectiveness, unpleasant surprises nonetheless abound.
Together, irregular purchases, the seemingly irregular annualized payments on larger items and surprise systems failures, conspire to trip us up and create either debt or difficulty in saving for the future. “I had been working really hard,” we insist, “and I needed a vacation. Then my engine died and I had to pay that big bill. That’s why I have $20k of debt.” It all seems so natural and we are innocent victims.
Businesses have disciplined processes for managing seeming irregularities and turning them into anticipated events. They have annual budgeting cycles in which departments project income and anticipate hiring and capital expenditure needs. Capital expenditures are depreciated over their expected useful lifetimes and their replacement is anticipated. Banks forecast loss rates on different types of debt and establish loss reserves that they dial up and down based on economic projections. Insurers employ actuaries to anticipate claims.
Individuals and households are, on average, much less practiced and deliberate in anticipating our needs – though some are better at it than others. Each of us in fact only lives once, so much of what happens comes at us as a surprise, particularly as we pass from being students into early adulthood, then parenting and careers and — all of a sudden — our hair is grey, our youth spent.
Having constant visibility into the monthly run rate of our essential expenses also helps us keep our eyes on another insidious category of expenses that can have a vampiric effect on our financial health: monthly subscriptions. All organizations — for- and not-for-profit — would prefer regular to irregular income. So much of our world has gone in the direction of subscriptions. Video and music streaming services, newspapers, magazines, loyalty programs for public radio and TV, politicians, software, everybody wants $9.95 a month. It’s all too easy to lose track of what we’re spending.
There are many things in life we cannot control, cancer and capital markets first and foremost. But there are plenty that we can. To the extent that we can reduce the number of financial surprises we face by understanding what it really costs to live each month and year, we can sleep better and make better decisions about what’s really important.
Clark Troy was born in Durham and educated in the Chapel Hill-Carrboro City Schools, then elsewhere. He is a financial planner at Red Reef Advisors and may be reached at firstname.lastname@example.org. When not working, he reads, plays sports, naps, drinks coffee and plays guitar, not necessarily in that order.
Well said, Clark.