In a world where it’s so easy to lose yourself in the minutiae of personal finance, one very useful exercise is to see where most of your money is going.
I’ve decided to share this publicly for 2012 and show you where our family spends the big bucks. There are three big areas for us:
Transportation is an expensive proposition in the modern world, and the cost of getting around increases exponentially as one moves away from city centers, locations of work, and service areas. As a society, we’re increasingly looking for more “affordable” homes at outrageous distances that end up hitting our budget elsewhere and can cripple families when the cost of things like gas goes up.
We are lucky to live within a mile or two of most basic services and within 5-10 miles of just about anything we would need to drive to on a regular basis. Even so, the privilege of driving sets up back quite a bit every year. The driving budget consists of the following for us:
- Car payment: We are down to a single car payment for the rental car we bought two years ago, and our other car is completely paid off and in great shape. While getting this loan paid off this year would feel great, there is very little interest remaining on this loan and therefore little benefit in getting it paid off. We are far better off committing extra resources to long-term debt like high-interest student loans.
- Fuel: The cost of a gallon of gas is the biggest variable in our transportation budget, since we drive a predictable 20,000-25,000 miles a year in total. With that cost just about doubling in the last few years, we’ve learned to live in the “new normal” of fuel expenses and incorporate it into our budget.
- Service & Repairs: Our cars are five and six years old, respectively, so some service costs are going to just be part of the territory. Both are staying in great shape, however, with only minor repairs required, and our rental car is protected by an extended warranty.
- Car Insurance: Thanks to a recent switch to Esurance (get a free quote), we’re getting an excellent rate that is discounted even further when we pre-pay for 6 months of coverage.
Managing and trimming the cost of driving is tricky. The only way to eliminate the cost of a car payment is to pay off the car. The only way to spend less on gas is to drive less, which is not always a practical option. Service and repairs are an unpredictable expense, mitigated only in some ways by diligent maintenance and care for the car. Car insurance, as much as it can be reduced, can only get so low.
In the end, transportation represents a relatively fixed cost in most people’s lives, one that changes only by a conscious choice in place of residence, job, or lifestyle. If you have the flexibility and desire to change any of those things, go for it!
Health Insurance: $9,200
The cost of health insurance is getting alarming. In an informal poll of my friends, many are choosing to go without coverage entirely because the cost is absurdly prohibitive. Even with our coverage which eats up a considerable amount of money each year, we must cover the costs of large deductibles and co-payments. Policies which cover everything, the types of policies many of America’s workers were used to getting 5-10 years ago, can cost 2-3 times more in the private market than what we’re paying now.
With two young kids at home and the cash cost of healthcare being so high, I consider insurance an essential and necessary evil, even at this cost.
Here’s how this category breaks down:
- HDHP: A high-deductible health plan, combined with a tax-deductible HSA account, covers me and the kids. It has a decent, $3,000 deductible which I need to cover in full every year before the plan pays for any sickness visits, although all preventative care (including the kid’s preventative care), is free all year.
- Conversion Plan: When my wife was laid off 2009, you might remember that we considered a number of options for her continuing health care coverage, but the most direct and more affordable option was a conversion plan from the group policy. Years later, it’s one of the few policies her “pre-existing conditions” (e.g. previous C-section birth) will qualify her for, and the premium on this policy is quite pricey.
- AFLAC: A few years ago, I outlined how getting an AFLAC hospital policy is like finding free money laying around, and it has helped us again and again in times of need to cover as least some part of insurance deductibles and other expenses.
The cost and availability of health insurance is a huge wildcard as various provisions of the Patient Protection Act come into play next year. Among them is the removal of pre-existing condition bias from the pricing and underwriting process, which might increase availability for people like my wife, but could also increase overall premiums. What happens remains to be seen, but the costs of health care in general are almost certainly not headed down, which is why we’re stashing as much as possible in our Health Savings Account now.
Groceries close out our tri-fecta of big expenses for 2012, averaging out at just north of $400/month for the year. Food is one area where we’ve definitely seen inflation, though it’s more subtle than the pain at the pump, because there are more items and variables to track mentally than just a number at the pump.
I’ve tried every trick in the book for cutting down on grocery costs, including shopping with coupons, buying in bulk, meal planning, etc. I’m amazed when I hear about families that spend $70 or $100 every month on food, because that’s what I spend when I walk out of the store with 8-10 things. Needless to say, I haven’t found a way to feed my family with 8-10 things yet, so grocery spending remains a big percentage of our budget.
(Curiously, between the time this post was written and today, I found an interesting article in TIME by Dr. Oz about this very topic. It’s from the December 3rd issue–check out Give Frozen Peas a Chance if you subscribe to the magazine. Perhaps not all is lost.)
I take comfort in the fact that we cook almost every meal at home, we rarely buy processed foods, and that we’ve learned how to make sure that very little food ever goes to waste. All things considered, we’re every efficient with the money we spend on food. I just wish it was less…
So that’s what took a big chunk out of our budget last year–how about you, what were your biggest expenses?