Do you ever find yourself wondering—perhaps when you look at your paycheck or even your W2–I make a good living, why don’t I have more money saved up?
You might look at your income and your regular expenses and think that you should be saving more, but somehow it all seems to just disappear, almost as if there are termites gnawing away at both your wallet and your checking account. And perhaps there are a few termites infesting your finances. Call them “stealth expenses”—stealth because we usually underestimate them—if we even notice them–expenses because that’s just what they are.
We all have fixed expenses that we know only too well—house payments, car payments, student loan and credit card payments. There are also day-to-day survival expenses, like groceries and gas. We’re very familiar with all of these, but it’s those others, the variables, that slowly suck the life out of a budget. Those are the stealth expenses, the ones that aren’t always so easy to measure or even to prepare for.
”Where does all my money go?”
Stealth expenses are “soft” expenses that hit us in small chunks, but they’re substantial when taken together. Worse, because of the variables related to each, you can’t know with any degree of certainty what they’ll cost you in any given year. The prime suspects:
Insurance. This category is complicated by the fact that it usually has several components–home, auto, life, health, etc, that add up to many thousands of dollars each year. Often they’re paid in ways we don’t notice, such as payroll deductions for health insurance and the little corner carved out in the monthly house payment that includes homeowner’s coverage. Then there are some policies that have annual, semi-annual or quarterly payments that can escape yearly budget projections. They all add up to less savings in the bank at the end of the year.
Co-payments, deductibles and co-insurance provisions. Uncovered health expenses–deductibles, co-pays, co-insurance (the percentage of first dollar medical expenses you’re required to pay past the deductible—nearly every health insurance plan has this provision!) and costs for procedures that aren’t covered—also fully qualify as blind-side expenses, and they have an uncanny knack for hitting at the worst possible times. In any given year there’s no way to know what they can be, but they can torpedo a budget in short order.
Utilities. Utilities might the biggest of the stealth expenses. They can easily amount to hundreds of dollars per month but we don’t notice because it’s usually split between several bills (electric, water, garbage, gas, cable, internet, etc). A major complication is weather, which can increase payments even if you’re on a budget plan. Another is unexpected and often steep rate increases. Many utilities are virtual monopolies and if they’re approved for fee hikes you’re stuck.
Entertainment. The stealthiest of all stealth expenses, perhaps because we don’t like to think about budgets and saving money when we’re planning on having a good time. Like dominos, one fun activity usually leads to another, like dinner and a movie. Then there’s the gray zone factor—is eating our part of your food budget or is it really entertainment? What about cable TV? And how to you establish an entertainment budget—and live within it—when you don’t know exactly what your needs will be? Entertainment is, after all, driven more by emotional factors than logic.
Car repairs. Probably the most unpredictable of all stealth expenses, you can budget for this but you can easily miss by thousands of dollars. The reason is the wide variation in repairs costs. Replace a battery at $150—piece of cake—replace the transmission at $2,500–now we’re talking real money. Multiple major repairs could mean that all budgetary bets are off. This is a category where you can get off easy with $500 one year, then get clobbered by $5,000 the next. The older the car or the more vehicles you have, the less predictable the expense will be.
Holidays—especially Christmas. There’s often a tendency to think that this expense can be blended into a budget with little extra effort, a notion that usually breaks down quickly when the January credit card blizzard hits. Christmas in particular is difficult on a budget in part because of its sheer size. It sits astride the “holiday season”, sandwiched between Thanksgiving and New Year’s, and that season often facilitates a breakdown in budgetary order. Not only is there shopping for gifts, but there are dinners out “on the fly” because there’s no time to cook. Then there are decorations and often travel. A blessed holiday for sure, but a hard one on the finances.
If you think about if for a bit, you’ll come up with even more categories that qualify as stealth expenses, but the more important issue is taking control of them. Because stealth expenses have multiple sources, there need to be multiple plans on how to deal with them.
Keep close tabs on ALL spending
Stealth expenses like entertainment get out of control precisely because they escape close scrutiny. Tracking them will show the reality of what you’re spending, highlight substantial increases in spending trends and give you a chance to make cuts where necessary.
Controlling fixed expenses is more important than we think
Stealth expenses usually eat up a bigger chunk of your budget than you think. The wide variety of them can make it hard to establish a workable budget. An alternative is to lower fixed expenses, like housing and car expense. Not only are there fewer fixed expenses, but they’re usually larger so cutting will have a far greater impact.
And here’s a bonus: the lower your fixed expenses are, the lower your stealth expenses will be. For example, the size of your home will affect your utility expenses, while the cost and type of car you drive will have a huge impact on both car repairs and insurance costs.
Set up a dedicated savings account for predictable but irregular expenses
Set up a third savings category—somewhere in between an emergency fund and long term investments—that will cover the loosely expected and vaguely predictable nature of stealth expenses.
Emergency funds are typically based on predictable monthly living expenses, which include regular insurance and utility payments. However, car repairs and health insurance deductibles and co-insurance provisions are close to impossible to predict with any certainty—all we know is that they can happen, and will at some point in the future. How do you save for that?
One way is to average how much you’ve spent on these over the past few years. It’s far from scientific since car repairs can increase as your vehicles age, and healthcare is always an X factor. You could use a worst case scenario on healthcare, for example, by adding up the deductible and co-insurance provision that you would have to pay for a large medical expense for one person, then add in an average amount paid for car repairs. You could also begin loading up the account as the holiday season approaches, or you have a wedding or graduation to attend when entertainment expenses will increase.
Liquidity is vastly underrated as a budgetary tool. The lack of it is a primary reason people go into debt. Don’t overload investment or retirement savings at the expense of near term needs. You’ll pay for these one way or another, and it’s always best to do so without using credit.
A “stealth expense” is any expense that we would be likely to underestimate or to even exclude from our budgets; can you think of other examples?