June 10, 2007

The Unexpected Costs of Home Ownership

"I care. But not t-h-a-t much."
-- Herb Cohen, negotiator
There's an interesting post about Managing the Cost of Home Maintenance and Repair on A Canadian and her Money. The idea is to setup a reserve fund for predictable and unpredictable expenses. This works well for condominiums because predicting is easier when there are many units. For one home, the statistical approach is less meaningful.

Let's consider a simple example: death from an injury. The chances are 1 in 1,755 in a year and 1 in 23 during a lifetime, according to US statistics. How does knowing that help us as individuals? We're digital. Dead or alive.

Similarly, our fridge works or it doesn't. Our roof leaks or it doesn't. The furnace breaks down or it doesn't. Each of these items has an expected lifetime, but how long they last for us can be much longer or shorter. So how to we plan? If the furnace is expected to last 15 years, and it's still working well, do we still replace it? Chances are we'll wait and perhaps get many more trouble-free years of service.

Some expenses can be scheduled. If the roof needs replacing, you might be able to wait another year to free up money for "squeakier wheels".

Budgeting Is Boring
Saving is important, but budgeting is boring. Much like dieting. Many of us start, quickly lose motivation, quit and feel guilty. Worse off than when we started.
It's clearly a budget. It's got a lot of numbers in it.
--- George W Bush
An Easier Approach
An easier approach is to save money automatically by "paying yourself first" through automatic transfers from your bank account. This money can be used for savings and emergencies. In essence, we're self-insuring. So we're prepared for emergencies.

If we're faced with unexpected expenses and don't like borrowing to spend, we'll feel out of our financial comfort zone. So we'll likely reduce other discretionary expenses until we're comfortable again. So even if we dip into our savings, we'll work to restore them.

Does this make sense? Or should I leave the psychology of human behavior to others :)

1 comment:

the money diva said...

Promod - I was going to leave a very long comment here until I realized that I probably should post about it instead to continue the debate.
Thanks for your comments. Even though I don't agree with you on this one, you have a lot of insights that help me to understand the issues more clearly.