Budgets break, and they break all the time. Sometimes they break because unexpected life events come up that are just out of your control, like a large hospital bill, a major home repair, or finding out that you have three cavities at the dentist. However, many times our budgets break because we either don’t have a budget to begin with or our budget doesn’t accurately reflect all of the expenses that we have to pay for each month.
Yes, it's true, budgets are meant to be flexible and not set in stone. You can project your expenses for the month all day long, but often life throws curve balls that have you bobbing and weaving to cover the costs each month. As a Certified Financial Planner, I spend a lot of my time looking at budgets, and it's quite frankly where I spend most of my time when I work with a client.
Generally speaking, there are five main budget busters that either aren't planned for in your budget or are overlooked opportunities to make a tweak in how you are spending your money.
If you have student loan debt, it's no surprise to you that it’s one of the top five budget busters. Student loan debt doesn't just mess with your budget. The real cost of student loan debt can trickle down to the delay of life events like marriage and starting a family and take a toll on your entire financial future.
One of the best strategies to counteract student loan debt is to come up with a solid payoff strategy – one which examines all the options including refinancing and consolidation through financing companies like Earnest. Many people are overpaying on their student loans simply because they haven't looked for another option. A better payment plan can not only fit within their budget but also help achieve the goal of paying off student loans rapidly.
One budget buster that sends budgets cratering is overspending on travel and not utilizing credit card points, the best frequent flyer programs, and discount sites to maximize your travel budget.
Being resourceful with travel plans is one way to save hundreds, if not thousands, of dollars each time you travel. Credit cards like the Chase Sapphire Preferred Rewards card is an example of a stellar card to help you bank serious travel freebies. If you spend $4,000 in the first three months after opening the account, you receive a bonus 50,000 reward points – the equivalent of $625.00 in travel funds. That’s essentially a free plane ticket right there.
Just how do you spend $4,000 in 90 days? You pretend your credit card is a debit card. You use your credit card to pay for every expense during the month and earn points for doing so. Then you simply pay off your credit card bill every month and keep all your points growing towards more travel rewards.
There are also sites like Travelzoo, Secret Escapes, and Groupon Getaways that offer stellar travel deals to Europe, Mexico, the Caribbean, and more. Many of these deals will save you up to 50% the retail price, which means your budget has a fighting chance of staying intact.
Your credit score is based on five key factors:
Payment History (35%) – The most important component of your credit score looks at whether you can be trusted to repay money that is lent to you.
Amounts Owed (30%) – The second-most important component of your credit score is how much you owe.
Length of Credit History (15%) – The third-most important component is how long you’ve had a credit history.
New Credit (10%) – The fourth-most important component is recent credit inquires for new lines of credit.
Types of Credit In Use (10%) – The fifth-most important component is the mix of credit that you have–credit cards, loans, installment debt and retail loans.
Payment history is the biggest chunk of your credit score and therefore late payments have a sizable impact on your credit score. It’s easy to get in a rush each month and forget to make certain payments. However, that single late payment can have a dramatic effect on your budget.
Your credit score will go down, yes. More importantly, a lower credit score means that you are exposed to higher interest rates on your credit card and any future loans you may secure. A single 30 or 60-day late payment will hurt your score in the immediate future. However, a 90-day late payment can impact your credit score for up to 7 years.
If you've accidentally missed a credit card payment, the best strategy to keep your credit score intact is to contact the credit card company and ask for forgiveness. You'll need to be prepared to pay the minimum payment that is due right away (which, after a late payment fee, can be higher than your typical payment). If it's a single late payment, most credit card companies will be willing to waive the late payment fee and restore your account to its former glory. The key is that you are proactive whenever you notice you have a late payment.
Trying for a baby?
Starting a family is a joyous occasion. Many couples dream even before their wedding day about starting a family and devise long lists of possible baby names. For those couples who conceive naturally, it's a pure blessing. However, it's trending that many couples are waiting longer and longer to get married and start a family and as a consequence suffer some level of infertility.
Infertility, as difficult as it is on an emotional level, can also take a huge toll on your budget if you don't create a solid plan. Adoption costs have soared well over $40,000 and as a result, many couples are now looking at alternative ways to fund adoption like grants, crowdfunding, and even loans.
In vitro fertilization (IVF) also comes with a steep price tag. The average cost for one round of IVF is around $12,400, and most couples end up having two to three rounds before they conceive. There are also alternative ways to fund IVF with loans, grants, and even the option of moving to a state that is more IVF friendly with their health care laws.
If you're facing infertility costs, the best strategy for your budget is to devise a savings plan that allows you to pay for these costs without having to dip into retirement funds or turn to your credit cards as a long term solution.
When you’re trying for a baby you also want to think about leveraging life insurance that will protect against the risk of something unfortunate happening to you. Life insurance is a good investment no matter your age, but especially relevant if you are planning to start a family. When you’re young and healthy, term life insurance is an affordable way to leverage a large sum of money. We’ve got a life insurance checkup tool that is easy to use and will help you figure out how much life insurance you need.
There are also many different ways you can get life insurance. Some companies offer it to employees as an option, but that likely isn’t enough. It’s easy to to compare quotes for your own policy within minutes online.
Your most valuable asset
While we’re on the subject of protecting against risks, let’s talk about protecting your most valuable asset – your ability to earn an income.
It’s easy to get stuck in the trap of thinking that your car, your house, or your prized art collection are your most valuable assets. Those are just things that can be replaced. However, if you were to suffer a long-term disability, would you have enough saved to cover the loss in your income?
Building a strong emergency fund with three to six months worth of expenses saved is always a smart money move to make. However, you can easily see how fast you would burn through that emergency fund if you weren’t able to go to work and bring home a paycheck. A long-term disability is something that most families can’t afford but seldom prepare for.
Long-term disability insurance is a type of insurance policy that can step in and save your budget from busting should you suffer a debilitating injury. It provides a set amount of money each month to you after a waiting period, normally 60-90 days, that will replace a percentage of your salary. There are many different ways to tweak your long-term disability insurance plan that you can use to lower the price of the policy so that it fits in your budget.
You’re never going to have a foolproof budget. There are always going to be extra expenses and items that you just forget to incorporate. Instead of focusing on perfection, what you're aiming for is a budget works hard to reduce exposure to these five budget-busting expenses. Spend some time to go through your budget and see if you can find ways to eliminate some of your expenses and better position your budget for success each month.