4 Questions for Every Budget, Part 2

September 27, 2016
DMD Staff

If you're putting together a budget, you may get tripped up with questions over how to deal with your mortgage payment and your unpredictable miscellaneous expenses.

In

Part 1 of this series

, we looked at how much you should set aside for your future self and the often-difficult balance between paying down debt and investing. In Part 2, let’s take a look at an often-overlooked aspect of budgeting and the one key factor that derails more budgets than any other.

3. How should my mortgage payments factor into my budget?

The question sounds mildly absurd, right? For dentists, like anyone else, paying a mortgage is likely to be the single biggest overall expense on your ledger. So, yes, it will play a huge role in any budget. But the reason the question is here is more about the long-term status of your mortgage. A mortgage is, by its nature, a long-term expense that will factor into every financial decision you make. Many smart investors choose to intentionally overpay their mortgage payment each month, noting that this will lead to big savings down the road. But many often struggle with whether it makes more sense to do this, or to put that “extra” money you might use for overpayments into your investments instead.

The decision is a tough one that has pros and cons. Paying down debt, when possible, is almost always a good idea. The same funds, invested in the stock market, for example, would be subject to market losses. But if you have a very favorable interest rate on your mortgage, the extra payments may ultimately save you less than an interest rate earned in a solid investment. As with all investing decisions, there are important trade-offs, so consider your strategy carefully before building these numbers into your budget.

4. How do I properly budget for miscellaneous expenses?

Miscellaneous expenses derail so many budgets. In fact, they’re often the reason retirement savers drop the budget altogether. If so many expenses defy a category, they seem to say, why bother with the budget at all?

Any good budget will have a “miscellaneous” category for all disparate expenses that come up in a given month or year. A target budget for miscellaneous expenses can be made by simply looking over purchases made over a few months’ time and calculating an average. Yes, there will be outlier months, like the time your car battery went kablooie on the same day that the water heater pooped out. Treat those months like the Olympics treats diving scores: throw out the highest and lowest months before taking your average.

While it is entirely possible to break your budget by including too much of a line item for miscellaneous items, it’s more typically allocating too little for miscellany that gums up the works. Play around it with it a bit, and revisit your budget often.

Once you have a good budget in place, however, it’s rarely a case of “set it and forget it.” In part 3, we’ll look at ways to stay on track.