Stacking Pennies recently asked on her blog how she should account in her budget for spending on a new car. She’s taken out a 0% loan (that she doesn’t need) in order to take advantage of the ability to leverage that money at no risk. There are also complications involving getting a buyback on her previous car.
She wonders if she should put the 20K in a separate account both physically and mentally as if she hadn’t gotten a loan at all, or if she should incorporate the buyback and payments into her regular budget, and if so, how?
Now, there’s a proper accounting way to answer these questions, using assumptions about depreciating assets and so on, but proper accounting methods aren’t necessarily that helpful in personal finance where we aren’t getting tax breaks on rates of depreciation (meaning you should still do them for rental property or small businesses).
Instead what matters is that you get the information that you need to get a handle on your spending and your savings so that you’re taking care of your future self, saving for things you want to save for, and not penalizing yourself unnecessarily in the now.
There’s no one right way to deal with large lump purchases in your budget. It’s whatever helps you keep track and make decisions.
I tend to think of things just in terms of my “emergency” fund (really it’s a slush fund since it includes money both for emergencies and for regular lumpy expenses) and how much it is growing or shrinking each month. Whenever we have to decide on housing expenses like rent or a house purchase I’ll look at the whole fiscal picture and map out what we can afford, but in generally I’m really lazy about keeping track of our money, so just looking at the size of our slush fund each month. We can do that because in general we spend a lot less than we earn each month. So in the new car case, the car purchase might deplete our slush fund below levels that I felt comfortable with, meaning more of each month’s excess would need to be diverted to savings, and any monthly car payment would make it more difficult to refill the slush fund.
Another common strategy is instead of having one “emergency/slush” fund is to have specific separate accounts. So car spending would come out of the “car” fund and anything not accounted for with the car fund would have to come out of the actual “emergency” fund (or luxuries fund or what have you). Then you’d take into account the inflows and sizes of each of those accounts each month. This method is similar to my lazy method but allows for more control. You can better fine-tune your monthly spending and tracking of monthly spending so that you don’t have to have such a big gap between your take-home income and your spending.
How do you account for vehicle purchases (both with and without loans) in your budgeting?