This post is part of a series called “The margin”. If you missed the introduction, you can go back and read it here. In this part of the series, I will talk about building in a financial margin when you consider your budget for expenses. This is the second installment on the financial margin. If you missed the first one you can read it here.
A clarification before we begin again
After talking with a friend about yesterday’s installment, I realized my advice about the margin could be taken as a cavalier suggestion to simply spend more. That would constitute irresponsible and insensitive advice, especially when so many of us are doing the best we can with limited resources. Let me clarify, please, before continuing.
When I urge you to consider building a margin into your budget, please note, Dear Reader, I’m not suggesting that you budget or spend more than you can afford on the items discussed in this series. I’m merely asking you to think about the costs you can’t fully anticipate, and factor those in by adding a margin for error.
When you get real about the repairs your car could need, vet bills your pet could incur, the appliance that could blow at any minute, etc… you may find that there’s not as much room in your budget for the other things you’d like to spend some money on but don’t really need to. I would argue that that’s okay. If costs are going to come up that you will need to pay for regardless of whether you or not you want to, then better to cut back on cable service now and be ready to pay the mechanic, if that’s what it will take. Capice? Okay, let’s roll.
Part II: Food and clothing
As a nation, Americans spend far less on food than people in other countries and less than prior generations of Americans (thanks in part to heavy agricultural subsidies that make much of the food supply relatively cheap). However, expenditures on food still make up 11% of our take-home income, on average, and a lot more if you’re poor. Furthermore, it’s an area in the budget where we can exercise more discretion. The choice of exactly what and how much to buy is entirely in our hands. And then there’s the whole needing-it-to-survive thing. So for many reasons, food prices matter a great deal to a lot of people.
The US Bureau of Labor Statistics estimated that food prices rose 4.8% in 2011 and 2.5% in 2012. So far this year they are relatively flat, but are expected to rise again next year, by 2.5 to 3.5%. You can find a summary report at the USDA’s website.
These estimates are based on the price of groceries in a “standard basket of goods” as part of the Consumer Price Index, a much broader indication of the cost of living based on the price of housing, consumer goods (e.g., clothing), durable goods (e.g., appliances), utilities, medical care, etc… If the items in your grocery cart (or farmer’s market basket) differ significantly from a “standard (grocery) basket” – whatever that is – consider rounding up when estimating expected price increases. In addition, as more people shift their diets to favor organic, local, sustainable and/or allergen-free food, their spending often increases.
Of course, food prices also affect the cost of eating out, which on average, accounts for more than 40% of American families’ total food budget. The thing that unexpectedly drives up spending on meals out, perhaps more than food prices themselves, is failing to plan and/or pay attention. Many people spend more than they want to on eating out without realizing it. That’s why budgeting and tracking your spending is key to avoiding overages in your food budget.
And while we’re on the subject let me mention that according to a Gallup poll last year, young adults (ages 18-29) spent the most money on food of any age group. What the heck, guys? If you can’t afford it, and you probably can’t, stop eating out all the time! Bring a lunch to work every now and then! Learn to make a couple of simple dinners you can eat at home. Come on, I’ll show you how!
Overages in your food budget doesn’t have to be the case if you make some changes to accommodate when prices rise. You can (permanently) borrow some money from your eating out budget. You can cook frugal dishes like lentil soup, chicken in a crockpot, minestrone and more. And you can look for ways to save money on groceries. I’ll cover this topic in a series of upcoming posts, but for now let me address one as it relates to “the margin”.
A big way to save on groceries is to buy in bulk. But bulk purchases can be bulky in a budget, too. Families that buy meat shares often have to save all year to prepare for the (just guessing at the number here) $600 expense. Seasonal produce bounties can present the same challenge. But you have to spend to save in this manner, and those large purchases can really cut into the regular food budget. Building in a margin can help with that, ensuring you have enough wiggle room to load up on apples (or beans) when the offer is too good to pass up.
Whatever strategies you use to buy and put food on the table, you can count on costs rising. Build that into your strategy, too, by arming yourself with knowledge about how to shop for and prepare economical meals AND by building a margin into your grocery budget.
This isn’t one I would have thought of as being subject to overages several years ago. But now I appreciate how clothing needs (and spending) can be unexpectedly affected by pregnancies, job changes, weight loss or gain, moves to a different climate, growing children and even vacations. I think it’s best to pick a target number (per person if there’s more than one of you), and do your best to stick to it. There are many ways of controlling spending on clothing, I’ll write about some of them another time, but given the unpredictable nature of life, it may to wise to build in a margin here, too.
What did I forget? Are there other common causes of unexpected spikes in food and clothing expenses? Do you have effective ways to deal with it? Please share.
Next time I’ll talk about why you may want to build a margin into your budget for automobile-related expenses.
Disclaimer: I’m no financial pro, nor professional. I do have common sense, some life experience, and smart friends who know about these things. However…
The information provided in this post is my personal opinion and does not constitute professional financial advice. The information is of a general nature only and does not take into account your individual financial situation or needs. If you need financial advice, Economist at Home recommends that you contact an appropriate professional. Furthermore, while this post may contain links to third party websites, these have been provided solely for further information. Economist at Home is not responsible for their content. The inclusion of links to a third party website is not an endorsement of the content provided or the third party itself.