Don't Let One Big Bill Blow Up Your Budget (Here's How)

29:49we didn't hear any other benefits, but we didn't ask Guy for his entire situation. So I do like the tax advisor from that perspective as well. So Guy, go to Morningstar. We're going to put a link in the show notes. Go to Portfolio Visualizer. Play with the efficient frontier. Think about the spectrum of simplicity through optimization. Work with a tax professional around strategy and timing. and intentionally hold off on making any major moves for a minimum of one year and perhaps even two years so that you don't let the cloud of grief impact your decision making. There is an important reason why there are many cultures around the world and many religions that have behavioral restrictions, traditional behavioral restrictions on what people do in the first year after a person passes away.

30:50In the Hindu tradition, for example, there are certain foods that you can't eat for the first year, depending on how strictly you observe. There are even some clothing fibers that you can't wear, or you are expected to shave your head. At a big picture level, I think what they're trying to impart is that your behavior, which is a reflection of your feelings and thoughts, will be different when you are going through the grieving process. Traditions that say, all right, don't eat these foods or don't wear these fibers for a given period of time are symbolically acknowledging the fact that behavior changes.

31:35So let yourself go through the grieving process first before you make any portfolio changes? We talked about portfolio predictability, Paula. The most difficult thing when I was a financial planner was not portfolio volatility. It was when something happens and a person is grieving and they become unpredictable. It wasn't the asset that became unpredictable. When people were grieving, some people buried themselves in their work and had tons of income, just tons and tons and tons of money coming in. Couldn't predict that because other people wanted nothing to do with the workplace, wanted to be alone, needed a sabbatical, needed time off, needed time away.

32:22I could not predict which one you were. Like there were so many times where we could predict out, okay, we think that you might be getting this raise. You look like you're on this management track. We could predict all these things. We could model those things. The one thing I could not model was grief. It's not the asset that becomes unpredictable. It's the person. Yeah. Well, thank you, Guy, for asking that question. Next, we're going to hear from Josh. He and his wife are expecting their first baby in November. They have some questions about how that's going to change their budget. So we're going to answer that in just a moment.

32:55But first, we'd like to take a second to thank the sponsors who allow us to bring you this show at no cost to you. Please support our show by supporting them. You know, when I was a kid, I remember on Christmas morning, I got lots of toys, lots of books, lots of clothes, gifts. The books were always my favorite. I'd spent all of Christmas Day just reading and reading and reading. But you know, none of those are things that I have anymore. They were wonderful in the moment. But decades later, I have no idea where any of those things went. But by contrast, when you give a gift that brings somebody financial security, that's something that lasts a lifetime.

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36:07Welcome back. Our next call comes from Josh. Hi, Paul and Joe. First off, thank you for the time and helping with our situation. I always appreciate the way you and Joe answer questions so thoroughly. My wife and I are struggling with how to bucket our savings and investments, as I feel like many people do in their early 30s. A bit more background. We are expecting our first child in November and would also like to move in the next one and a half to two and a half years. When we move, we would likely move into a larger house, either in our current area or a higher cost of living area, while keeping our current house as a rental.

36:47With our future fixed costs going up, but by an unknown amount, how should we be currently balancing our excess cash each month between a savings and a taxable brokerage. We currently save about$3 ,000 a month and split that 50-50 between the savings and the investments. Should this change once we have a kid? Finally, we don't have a true goal for our investments at this point besides assuming we'll need it for ourselves as we grow older and our kids grow older. Is that okay? Thanks again for the time and help. Josh, thank you for the question and congratulations on the baby that you're expecting in November.

37:28To your question, you say right now you're saving$3 ,000 a month split 50-50 between cash savings, savings in a savings account versus investments. And there's no particular goal that you're saving for. There's just a general sense of, hey, we know savings is a good idea. Given that there is no goal, My assumption is that the 50-50 split is also just sort of something that you pulled out of thin air. Hey, it's a good idea to have a mix of long-term investments and short-term savings, so let's just do this at a 50-50 split. It's fantastic that you're doing that. That has given you a solid foundation.

38:05But from this point forward, the approach is going to start with some specific goals. And the most short-term change to your finances is going to be expenses related to the newest member of your family. Now, how much that's going to cost is going to differ wildly. What's cool is that there are a lot of websites where people have actually tracked baby-related expenses. So, I mean, you can look at broad aggregate averages, but you can also look at specific case studies. Jay Money, my former co-host, who writes a blog called Budgets Are Sexy, he had a baby budget tracker that was on his website, BudgetsAreSexy.com, where he tracked specifically to the dollar how much he spent on baby-related expenses.

38:59And of course, there were one-time startup costs, a crib, a stroller. And then, of course, there were these ongoing expenses, everything from diapers to increased health insurance bills. The FI couple, the FI couple, they also, I don't think they've done it quite to the dollar, but they have written publicly about the change in their budget after their daughter Zoe was born. The biggest change being that they upgraded to a more expensive home. And so there was a large change in their housing related costs because they wanted more space. You can find these examples all over the Internet of people who have publicly shared precisely what those numbers are.

39:48And you can use that to try to model out a budget based on your lifestyle, your geographic location, and other factors. So that in terms of short-term savings is the first thing that I would start to draw out a budget for and then start when it comes to specific goals, start setting ultra-specific goals for that short-term bucket of savings around how you're planning for these new costs. Yeah, I think the through line of our answers today is going to be the concept of modeling. and while Josh says that he doesn't know what the higher cost of his new house is going to be, it doesn't mean that it's not findable or it's not modelable.

40:39He can certainly look at different costs and say, okay, I think my new mortgage is going to be X. My property taxes are going to be why. I can estimate my homeowner's insurance as Z. I think the home improvement cost, just based on what I am spending now and common numbers for that neighborhood are not unfindable. I think all of these things can be modeled. And certainly they're not going to be perfect, Paula, but what they'll do is give Josh and his spouse this idea directionally of where we need to be. And when Josh says there are no goals and is that okay? It is way okay. It's a hundred percent okay.

41:28But the more specific that you can be, the more efficient you can be with your funds. We tend to hold money back in reserve and we're not sure if we're going to need it now. Or we might, if we're risk takers, which is a percentage of the population in general, we may take too much risk because we feel like nothing's going to come up today. And then, oops, my bad. All of a sudden I need it today. The market's down and I'm taking money from a position that I shouldn't have taken it from. So the more specific that you can be, the more efficient your money will be. But it's okay to say, you know what?

42:07But I just long term, I kind of want to retire around this time. I think I want to use the same. Again, I would still model it, even though they're kind of nebulous. I would still begin to model what does the future look like if I just keep my lifestyle the same? If I do nothing different, how will I need to plan for this future? How do I make sure I'm putting away at least enough money to get a future that looks murky? And you're not alone there. That is a ton of people. In fact, Paula, so many people freak out about this idea. You know, you hear these people online talk about legacy and about leaving your mark.

42:46And you're like, oh, how do I just the future looks so big. And I feel this big sense of responsibility. It's much easier to do what a gentleman named John Acuff talks about in his new book, which is to. He was a guest on this show. Yeah. Which is to look backward. Don't look into that murky fog and say, how do I leave a legacy? That's going to mess you up. But if I look backward and go, you know what? What are the things that I really love doing? And what are the things that spark joy? Again, there's another through line. How do I get more of that in my life? That helps you lead to buckets that are fulfilling, that seem attainable, that seem much more manageable in your headspace.

43:33So I like when I'm looking at those long-term goals to look backward instead of forward. Works much, much better. You'll freak out less. But to your point, we already know a few big ones. We know at some point you will want to retire. So if you just keep things the same, how can we model that? You can easily model that at any of the websites for the big asset managers, Fidelity, Vanguard. They all have very simple tools to help you model that so you know that you're putting away at least enough to reach that goal. Then second, we know the new house. We know approximately what the cost will be and the neighborhood you're going to live in.

44:15We can do some modeling there. Again, not going to be right, but we'll be directionally. So we know how much to put away for improvements for the house. We also know what it's going to do to our cash flow-ish. A thing that I like doing, by the way, Paula, to model cash flow is that once I have this estimate of how much more expensive my lifestyle is going to be, set up an automatic deduction from your paycheck for the additional amount, for the additional strain of the baby and the house, and have that money just go into a savings account so that you can feel this money leaving your budget. The cool thing is, is if your budget is exceedingly tight, it's in a savings account.

44:58You just get the money back. Right. But for you, it's almost like astronauts before they go into space. You know, they model weightlessness. They get the feel of how things are. They know what the turbulence is going to be on the way out. They try to make it as predictable as possible. We had an astronaut on the show, too, back in November. Mike Massimino. You can do the same thing here. So I'm I'm a big fan of modeling. as much as you possibly can to get a feel of what it might be like. In fact, Cheryl and I just recently did this, Paula. I'm on the other side where Paula is talking about when she finishes her vocation, what does she want to do next?

45:38And we're talking about slow travel. And we were just at a place that we really liked. And we said, hey, what if we rented a house here for a month? What would that cost? I don't know what it's going to cost 10 years from now. We're looking at doing that, but I can model inflation by looking back. I can also look at what pricing is now so I can start to put that into my budget. And we had a lot of fun doing that because it also helps you dream. What if we spend a month at that house? What if we spend a month there? That would be fun. So love the idea of modeling. And the thing is with essentially test driving a budget, don't conflate precision with accuracy.

46:16When you create a budget or when you test drive a given idea, a prediction about the future, right, you are planning this out in a way that feels precise because you've modeled this out on a spreadsheet and you've allocated X dollars to housing and Y dollars to food. And I say this to the students in my rental property investing course all the time. This is actually one of the major lessons is never conflate precision with accuracy. When you're modeling things out on a spreadsheet, those numbers, particularly if they're modeled to decimal points, will feel unduly precise. That doesn't mean that they're accurate, but that's okay because, as Joe says, what you're aiming for is to be directionally correct and to model something that is within a reasonable range.

47:24And in order to avoid the conflation of precision with accuracy, what I often tell my students is model out a couple of different scenarios, test drive a few different scenarios in which you're testing a worst case, a best case, and then you have a better sense of what some of those midpoint cases in between, which are more likely to happen, will be. when you're thinking about probabilistic future outcomes, think in ranges rather than uncertainties. I agree with Scott Galloway. And as the dad of twins, I'll say that kids will mess up your money and I would rather do nothing else. It is an expense that I don't regret.

48:05It was very expensive. But by the same token, again, we're not trying to be precise. We are just trying to model. And so if we're putting our budget in a spot, we have all kinds of different numbers that we can work from. The numbers are out there. My point was actually getting to 529s. I don't know if putting money in the 529 plan makes sense before the baby is born. I will tell you this. It makes more sense now that it's easier to move that money to a Roth IRA. and it's always been easy to change beneficiary and make the beneficiary yourself. So if you have any education plans for yourself in the future, regardless of the new rules around moving the money to a Roth IRA, you can make yourself the beneficiary or make a family member, a different family member, the beneficiary, and then use it for your own higher education in the future.

49:01You can change the beneficiary to the baby later. So there is some flexibility, but I think depending on what your aspirations and goals are around education in general, the faster you start saving for higher education, the better. And that's another bucket. But it also, again, depends on your thoughts around that goal. So I just want to bring up the 529 aspect of this. Well, with the 529, you have to have a social security number that's tied to that 529 in order to open it up. Right. Right. So if you were to open one prior to the child getting a social security number, you would have to open it for yourself and then later do.

49:44As I mentioned, you change the beneficiary later and changing the beneficiary later is is is not a problem. It is it is not hard. And I know people that have done that and they really like it. And it was great that they started early because then that money compounds for a longer period of time. But it really depends on your own aspirations around education, because even with the Roth rules, I think if you have a bent toward education yourself or your spouse has a bent toward more education in the future, then the risk of putting this money in a bucket with some barriers to get at it is much less.

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52:01You know, when you're a kid, you dream about being an astronaut or working with wildlife or all these cool things. And then when you grow up, you think about not just what you want to do, but also you think about this other layer to it, which is how do I want to impact the world? What legacy do I want to leave behind? And how do I want to do that through my work? For a lot of people, that's when you start dreaming about owning your own business. But to do that, you're going to need a website, a payment system, a logo, a way to find new customers. And that can be really overwhelming and it's a big workload.

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53:31Our last question today comes from an anonymous caller. and this anonymous caller requested a name she would like to be either Poe or Jala. Which one do you like better, Poe or Jala? I think Poe Jala. Poe Jala. Poe Jala. All right. Well, then our final question today comes from Poe Jala. It doesn't have to be either or, Paula. It can be both. That's true. That's true. Think big. Hey, Paula and Joe. Since this is anonymous, can I be called Poe or Jala? My question is about how to think about large expenditures in retirement. What happens when a large expense comes up, like a new roof, septic system, or car purchase?

54:16Does this count as part of that year's 4 % withdrawal? Or do you create some kind of sinking fund for such items ahead of time? If our withdrawal is$125 ,000 per year, a$25 ,000 roof is a substantial piece of that budget. Thanks for your guidance on how to wrap our heads around this important piece of the retirement puzzle. I think based on Paula, our answers for the first two questions, our answer here for Pojala is going to be very straightforward. I think modeling this out again is going to be the key to success. So, Joe, then my question back to you, and I have my own answer to this, but I'm curious how you would answer.

55:01how would you model for the unexpected? I think I have to look at what those unexpected things would be. As an example, there are some easy ones, right? At some point, my refrigerator is going to die. At some point, my muffler is going to be dragging behind my car. I'm going to need a new vehicle. At some point, I will need a new roof. So if I take those expenses, and then I take the average lifespan of that thing, then I think there is an ability to create this sinking fund for the thing. Not knowing the specific year, but knowing that in this timeframe, I'm going to need this big bucket of money.

55:48It's almost like when we look at insurances, Paula, like an actuary, an actuary does not know when the problem is going to happen, but they know the average magnitude and they know the probability risk. Right. We're trying to do the same thing. It's going to be harder in a case of one versus what an actuary does over a large population. population. But still, how great is it for Pojala to be able to be, I just love that name, to be able to know and have this certainty or to a certain degree, certainty that even if the worst happens, I have modeled this in and I at the very least have a plan. My answer is quite similar.

56:35What I would do is I would separate those big ticket items into two different categories. There are major expenses that you know with certainty that you will pay. You simply don't know when. So for example, you know that at some point your roof is going to need to be replaced, that at some point all of your appliances, your dishwasher, your stove, your refrigerator are going to need to be replaced, your air conditioning unit, right? You know that at some point all of those things are going to need to be replaced. Same with your car. Same with meeting the deductible on your medical insurance. You know that at some point these things are going to happen.

57:15You don't know when, but you can state with near certainty that at some point it will happen. And so I would set aside specific money just for those things. You know, when you're entering into retirement, I mean, you can set aside money. You can even earmark, if you wanted to use sub-accounts, earmark different buckets of money that are specific to each of those things because you know that eventually you're going to have to make a bunch of repairs on your car. And then at some point after that, your car is going to need so many repairs that you'll decide that you may as well just replace it. You know that both of those are going to happen.

57:57So a car repair fund and then a car replacement fund, you don't know when it's going to happen, but you know it will happen. And so setting aside specific money earmarked for those particular items, I think is a wise way to plan for that, for those types of big ticket expenses that will happen, but you don't know when. Now that's one category of big ticket items. The second category of big ticket items are the ones that you don't necessarily anticipate will happen, right? So this is different from car repairs and replacement. It's different from appliance replacement or major home repairs, right?

58:39Those things, you know they will happen. But there are other expenses that you never thought would happen. Maybe you get hit with a lawsuit. Maybe you have a family member who lives in another country and there is some medical emergency associated with that family member. And so all of a sudden you have to buy last minute airfare overseas to go visit a sick family member in another country. Those are the types of expenses that you never anticipated, even across the span of your lifetime. Maybe you live in a condo building and the HOA does a reassessment and every owner now has a special assessment of$20 ,000 that they have to pay the HOA and you didn't plan for that.

59:32So I would also, in addition to having funds set aside for your car, for your home, for your health insurance deductibles, I would also have a fund set aside for the unexpected, the literal expect the unexpected. And there is your emergency fund, which is all about the unexpected. You know, I'm thinking back to people I worked with when I was a financial planner, and I remember when people wanted to purchase an RV, you know, and a big expensive$100 ,000 RV more than that, or they wanted a second home, like some of these big expenses. The more that we can set that, and this really goes back to Josh's question too, the more we can set that money aside in a separate bucket and plan for that differently so I can model my retirement income expenses as a continuum and take these outside the budget.

1:00:33It's actually the same thing, Paula, as when we're working with people who are saving for retirement or for financial independence. And that is that, you know, grocery bills are going to go up and down, but the more that we can make our bills the same or make that, that budget the same every month, the more confident we're going to be putting a larger percentage of our wage aside every month. If I have a lot of discrepancy in my income stream all the time and my expenses, I'm going to have a lot of trouble putting money aside every month. Because in the back of my mind, I'm thinking, well, if I put this away and I put it in a 401k, a 403b, a Roth IRA, it's going to be a little more difficult to get to.

1:01:20So I should probably put away a little less in case something happens. Don't like doing that. So if I can make as many of these bumps, whether it's early in my life, the same or later the same and model out a consistent expense stream and take the big, huge rocks and make that a different bucket that now that's something I'm saving into for that specific thing, the better. obviously it doesn't have to be incredibly specific but again like we've said all the way through the closer you can model it to reality the more efficient you're going to be able to be with your money so joe that that is the through line for all of the answers is modeling is that weird yeah exactly exactly play play with spreadsheets i went in today not expecting that to be the through line right it's funny how we uh tend to have through lines completely unplanned through lines.

1:02:17Yes. And I'm wondering if Guy predicted that one. Remember how he said he likes to predict what we're going to say? Guy, did you think that was going to be the through line? Did you think that was going to be it? Did you get that right? Because I didn't. I had no idea. Well, I hope that as Guy said, I hope we added some additional layers of depth or nuance to some of these answers. Well, thank you, Po Jalla, for asking that question. Joe, I think we've wrapped this one yet again. Thank you for spending this time with us. Where can people find you if they would like to hear more of you? You can find my writing on financial planning in my book, Stacked, which I co-wrote with Emily Guy-Burkin.

1:02:59It is... You should read page 13 of that book. It features the Paula Pant. Yeah. Page 13, best page of the book. Stack is a series of achievements starting off with the thing I talk about at the beginning of every conversation, which is begin with the end of mine. And we talk about how to model that all the way through difficult things like the efficient frontier. So find stacked wherever finer books are sold and wherever finer books include page 13 and Paula Pant. This is the only book. This is an exclusive page 13 with Paula Pant.

1:03:39when uh when joe and i appear at events and he's giving away copies of the book that people have him sign the book and then uh they have me sign page 13 in boston you did yeah i did in boston i did it so joe when you uh went on book tour for stacked you went on a 40 city book tour and i joined you for eight out of those 40 cities and in all eight of those cities i was i wasn't expecting people to ask me to sign the book, but I signed page 13. Yeah. So that was a lot of fun. It was so great. Well, Joe, thank you again for taking the time to be with us today. Thank you, Paula. That's our show for today.

1:04:14If you have any questions that you would like to ask, if you'd like to hear your voice aired on this show, go to affordanything.com slash voicemail to ask your question. Also, please subscribe to our newsletter. If you go to affordanything.com slash newsletter, we are becoming much more active there and are sending out long, detailed newsletters with storytelling and information and inspiration to help you better allocate your money, your time, your focus, your energy to make those better decisions about how to live the best version of your life. Again, that's affordanything.com slash newsletter.

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1:05:40You can find me on Instagram at Paula Pant, P-A-U-L-A-P-A-N-T, on Twitter at Afford Anything, and you can join our Facebook group. Just search Afford Anything on Facebook. You can also find us on YouTube. Thank you again for tuning in and for being part of the Afford Anything community. My name is Paula Pan. I'm Joe Salcihai. And I will meet you in the next episode.