Do you ever feel like you are doing pretty well, paying your bills, saving a little money, and then you get hit with an unexpected car repair? Your small savings are quickly wiped out, and you’ve just added to your credit card debt. You may think you are paying all of your bills, but if this situation happens to you, even on occasion, you are not.
Nearly all expenses are predictable, if not in timing at least in that they will eventually come up. If you own a car, it will require maintenance. If you own a home, things go wrong in a fairly predictable pattern. Your health insurance has a deductible and an out of pocket maximum.
And of course there is the big one. Someday you will have to cover your expenses with your savings when you retire.
Think of these things as bills even though no one sends you a statement requesting payment. If you aren’t setting money aside for them, you aren’t paying all of your bills. But how do you know what to pay?
Take your car. You can estimate your cost of maintenance based on how many miles you have on your car. Your Mechanic, a national auto repair service, estimates that your car will cost $1,400 to service in the first 25,000 miles, $2,200 for the next 25,000 miles and $3,000 for the 25,000 miles after that.
Let’s say you have 50,000 miles on your car. Over the next 25,000 miles you drive you can expect to spend $3,000 in maintenance. If you drive the average of 12,000 miles per year, you will spend about $1,500 per year. You should set aside $125 per month toward future maintenance costs.
For your home, a good rule of thumb is to budget $1.00 per square foot per year for maintenance and repairs. If you have a 1,500 square foot home you should set aside $1,500 per year, or $125 per month. Of course you won’t necessarily spend that each year. Some years you may spend very little, but some years will bring major expenses, like replacing the furnace or roof. If you get in the habit of setting the money aside every month you’ll be prepared.
Healthcare is an easier one to identify. Your annual deductible is a known quantity. The average deductible for workers whose plan required one in 2016 was $1,318 according to a Kaiser Family Foundation survey. Sixty five percent of workers at small firms and 45 percent of workers at large firms have deductibles of more than $1,000.
With these numbers, it’s no wonder that I frequently hear an unexpected medical expense has tanked someone’s budget. But since you know what you might have to pay, you can prepare. For the average deductible you would need to set aside $110 per month.
So far we’ve identified $360 in “bills” that you should be tending to. There are others to keep in mind as well. If you have a family, you probably occasionally buy them gifts. Don’t let an anniversary or birthday become an unexpected expense. If your niece just got engaged, don’t wait until you book the plane ticket to start saving for the cost of traveling for the wedding.
The biggest unpaid bill in America is your living expenses when you retire. Nearly 40 percent of working age (ages 25 to 64) households have no savings in a retirement account. Of those who do have retirement savings the median balance is only $50,000. Even for households nearing retirement age the median balance is only $104,000. That won’t cover much of your expenses.
For every $333 of your monthly expenses not covered by other sources of income, such as social security, you will need to have a savings balance of $100,000. The good news is that you don’t have to save every dollar. The miracle of compounding return does at least some of the work for you.
If you start saving early, your annual savings rate can be lower, and your contributions to the total balance you need to meet your expenses in retirement can be relatively small. But if you wait, what you need to contribute grows.
In your twenties, if you start saving 10 percent of your income in a retirement account you should be able to reasonably cover your costs once you stop working for pay. If you wait until your thirties to start saving, you’ll need to be saving 20 percent of your income, and if you wait until your forties, the contributions will need to grow to a third of your income.
Are you paying all of your bills? If you aren’t setting something aside for the expenses that don’t come with a statement, the answer is no. Your finances will seem like a treadmill where every step forward leads to two steps back. Getting off the treadmill requires paying all of your bills. The ones that come with a statement and those that don’t.
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