If I asked you to stop what you’re doing, add up your monthly expenses, and deduct the total from your monthly income, I can nearly predict the result. You’d look up with a big smile on your face. There it is right on that napkin (did I mention we’re doing this over lunch?), proof that you spend less than you earn. Your income is greater than your outgo. You’ve nailed Rule 1. And I would be a bit nervous. At first glance, your list looks reasonably thorough. But it is not complete
The mystery for many people is if their spending is so much lower than their income, why can’t they get through an entire month without using credit to cover unexpected expenses, like medicine for a sick child, a semi-annual insurance premium, or a family birthday party?
Anticipate irregular expenses then prepare accordingly.
Most people, without actually thinking things through, assume their necessary expenses are those they pay each and every month. But not all necessary expenses recur as systematically as the rent, grocery bill, phone bill, and car payments. When we assume, however, that those are our only necessary expenses and allow them to grow to equal our income, everything falls apart when the nonrecurring, or “irregular,” expenses show up
Bills, expenses, and payments we make every month are generally not the problem. Somehow the rent and utilities get paid and the family gets fed. The problem is irregular expenses. This is the way most of us think: the bills I paid this month are my necessary expenses. Everything else is optional.
If an expense is not in my face at this moment, I have a choice whether to pay it or not. And if I have any money left at the end of the month I can spend it any way I want. The last thing on most of our minds in the middle of summer is Christmas. Who thinks about a major appliance breakdown or a big household repair somewhere out there in the future?
The solution for this problem is simple. You must become a money manager. If you don’t know how to manage money, you’ve come to the right place. I am going to teach you how to do that here in Rule 4. The purpose of Rule 4 is to plan ahead for irregular and even unexpected expenses in the same way you anticipate the expenses that you are keenly aware of because they happen every month.
Of course, this takes the foresight to look at an entire year rather than one month at a time. For example, I don’t believe I have ever seen a person include Christmas gifts in their list of monthly expenses on the first go-round. And most people don’t allow for clothes or family vacations when they do a quick tally of their routine expenses. Here is the easiest way I know to implement both the anticipation aspect as well as the preparation required by Rule 4.