From time to time we encounter the inevitable occasion of having to spend money on big ticket items. By “big ticket”, I mean a sum so large that your monthly spending budget is not enough to handle, or that even if the said budget could manage it, you end up not having anything money left for your monthly miscellaneous expenditure. Think washing machine, PDA, laptop, and you get what I mean.
Typically, for sake of good order, we match big ticket expenses with big ticket money – that is, a lump sum that does not happen on a monthly recurring basis, eg bonus, lottery, capital gains from stock market, monetary gift, etc. But then at times (say your P.C broke down), it’s a matter of life and death and we just do not have the luxury to wait. So what do you do? Such that you do not burden yourself with a sudden big amount that would upset the balance of your ratios?
This is when you learn a new word – amortize. As per the definition of an online dictionary, to amortize means to “write off gradually and systematically a given amount of money within a specific number of time periods.
Let’s put all these in simpleton terms.
Assuming Ms Lala’s monthly take home salary of $4,000 is divided into 70% living expenses ($2,800), 20% savings/investments ($800) and 10% spending money for frivolous items ($400). One fine day in March, her son decided that it was funny to wash his bake beans dinner in the washing machine. The poor old machine couldn’t take the abuse and broke down. A new washer would cost Ms Lala $550. To amortize, Miss A spreads out the $550 over a period of 5 months and it looks something like this:-
April 2009 – $150 ($100 from 70% money, and $50 from 10% money)
May – $100 (from 70% money)
June – $100 (from 70% money)
July – $100 (from 70% money)
Aug – $100 (from 70% money)
At the same time, from the period from April to Aug, her 70% money goes down by $100 every month to $2,700 (10% money also goes down by $50 in April). Assuming there are no further amortizations, living expenses returns to status quo at $2,800 by Sept. Spreading out the cost of a big ticket item over a period of time is certainly easier to live with, than to have to live with $550 less in a single month.
There are no hard and fast rules as to how you should amortize. You could amortize over a longer period of time, or you could get over the short term pain of living with less (provided you could) and revert to your normal budget the soonest possible. You could “draw money” from the living expenses budget or the frivolous spending budget or a combination of both. No matter which way you do it, the golden rule is NEVER to exceed your ratios every month.
I am not suggesting that you take an installment plan offered by a vendor. The amortization schedule mentioned in the above example is merely a book entry to enable Ms Lala to keep to her discipline of maintaining the 70: 20: 10 ratios every month such that they do not go haywire due to the presence of a big ticket item, while the actual outflow of cash paid to the vendor would have already taken place at the onset when she paid for the new machine. And yes…. you need to keep some sort of record to keep track of things!
Once you are used to spreading out your costs, you could use it to plan for a host of other things – an overseas holiday, a generous gift for your mum’s birthday, face lift, a life-sized Chewbacca etc. Of course, we should not get overly aggressive and use it as an excuse to buy something beyond our budget and spread it over a ridiculous period of time like 24 months!
In life and everything else, moderation is an important sustenance. As Confucius said, to go beyond is as wrong as to fall short.