The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: greg1977 on January 19, 2014, 08:18:45 PM
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Hi everyone
I'm a new Mustachian but will save a formal case study for another day. I am going through my budget strategising a plan of attack for 2014 (a few weeks late I know). One thing that is tripping me up is this:
-I pay my car insurance monthly, but have the option of paying it in one lump sum each year
-I pay my property taxes monthly, but have the option of paying it in one lump sum each year
-I put money in a separate savings account each month for eventual car repairs
-I do the same (in separate accounts) for: vet bills for my dog, travel with my wife, and one or two other things
This is money (let's call it $1,000) that I either pay monthly (instead of annually) out of convenience or set aside to ensure that I don't go into debt when my dog gets sick or my wife and I need to get out of town for a few days.
Here's what I'm confused about:
My wife and I invest $4,000 each month. Should we stop the aforementioned payments/transfers and invest $5,000 each month instead? Will it help a lot in the long run to have this extra $1,000 working for me in investments rather than sitting in savings accounts waiting to be spent? Or is that a dangerous game to play? Here's an illustration to help:
Jan- invest $5,000
Feb- uh-oh, property taxes are due ($1,400). Invest $3,600
Mar- invest $5,000
Apr- invest $5,000
May- ooops, dog is sick ($300). Invest $4,700
Jun- car insurance is due ($1,200). Invest only $3,800
So... am I better off isolating as much money as possible each month, deducting what I need, then investing the rest? Or should I continue paying things monthly and building up little piles of money in savings accounts? Why?
Thanks very much!!
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To address one of your questions: when given the option to pay my car insurance monthly vs. annually, I have always chosen to pay annually because there has always been a discount for doing so. If there were no discount, then I might just pay monthly.
As far as the rest of it goes, I think it's a matter of personal preference. I do it in a sort of hybrid way to what you described. I budget some savings each month toward certain recurring expenses, even if the expenses are annual. For example, for my car insurance, which costs around $500/year, I budget about $42/month toward a "Car Insurance" category in my budget application (YNAB (http://ynab.refr.cc/8TWD22J) -- that's a referral link). This way when the premium comes due, the money is already saved and readily available. For car repairs and medical expenses, which are less predictable but somewhat constrained thanks to insurance, I maintain budget categories with a balance equivalent to my insurance deductible for each. For travel/vacation, I budget what I think is reasonable, with the understanding that if I decide to exceed what I've budgeted, I will have to draw from some other budget category to cover the shortfall. I direct any remaining income to investments. When a given budget category falls below its target balance, I replenish it first before resuming investment contributions. Some months most of my budget categories don't require any replenishing, so more of my income goes straight into investments. Other months, I'll have just spent a chunk of one category so I replenish it first and then direct any remaining income to investments.
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Annually where possible. Often it has the discount that Nothlit mentions, but even if it doesn't having to only deal with it once/yr instead of annually or quarterly is worth the small opportunity cost of a few cents. If it can be set up to auto pay monthly, that works too. Just something where I don't have to manually do it monthly.
Jan- invest $5,000
Feb- uh-oh, property taxes are due ($1,400). Invest $3,600
Mar- invest $5,000
Apr- invest $5,000
May- ooops, dog is sick ($300). Invest $4,700
Jun- car insurance is due ($1,200). Invest only $3,800
I definitely do this. Our paychecks come in, we spend whatever we need to, and we save/invest the rest. How much we save each month fluctuates based on that (not too much, usually, but sometimes there will be a big hit, like in April for taxes).
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I'm also a new Mustachian, so grain of salt and all that, but I'm doing what Nothlit describes: I pay annually whenever there's a discount (even a small one), but I save monthly via YNAB.
The benefit of saving ($60/mo) rather than carving it out of that month's inflow ($720 in one shot) is that my expenses + investment and saving rate is a little more predictable/easy to calculate. It's aesthetic, mostly.
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I generally pay things annually, unless there is a reason not to. (Property taxes are semi-annual.) Since I have several rentals, it makes it easier to sort out which insurance payments apply to which property. I try to spread out my annual expenses so it keeps things even-ish:
January - Christmas pay-off
February -Home insurance
March - Property tax
April -Income tax
May - Rental #1 insurance
June - Car insurance
etc.
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It depends on if you get discounts, and are those discounts better than the alternative rate of interest you could earn (which I assume at 0% now). If it's a discount, I pay it, if not, I don't. The only exception to this is services from small businesses that could potentially go bankrupt. I won't pay my gym membership annually, regardless of the deal.
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I'm in the annually-if-discount camp,. The car insurance is stupidly cheaper (almost 10% in my case!) with some carriers when you pay for 6 months, so that's what I do.
For anything that is non-necessary, like gym membership, or any online service like netflix, take a good hard look at whether you would actually use them consistently, or whether they offer you the discount so you forget about it. A ton of businesses operate that way, especially for stuff that is seasonal and they're afraid of people cancelling when seeing a regular small-ish charge every month instead of one lump payment at a time of the year when they actually need it.