The Miscellaneous 10% Buffer

After advising clients on how to track their spending and develop a budget for a while now, I’ve found a need for a line-item expense I affectionately call “The Miscellaneous 10% Buffer.”

When creating a monthly budget, the first step is to calculate your income.  For simplicity’s sake, let’s assume this is an after taxes, deductions, and retirement contributions number, also called your take-home pay.

The next step is to allocate that income to expenses you have to pay every month, like insurance, the mortgage, student loan payments or other debt obligations.  After that comes fixed living expenses, i.e. the things you’re not legally required to pay for but (generally) can’t live without, like utilities, food, medical co pays, internet, personal care items, and home/auto maintenance.

Once you’ve budgeted for the things you CANNOT live without, whatever’s left over goes towards the things you CAN live without, also known as “Discretionary Expenses.”  This includes things like your country club membership, housekeeping, travel, eating out, entertainment etc.

Wait – what if the dog needs an annual heartworm check and shots? What if it’s June and you have to buy everyone and their mother a wedding present? What if it’s Christmas shopping time? What if that 6-month checkup bill for your 8-month-old finally came in the mail? What if you just can’t live without that leather couch that’s on sale for three days only?

Personally, I have yet to make it through a month where no incidentals arise between the house or the dog or the kid or the husband. Thus, I pad our expenses and plan for at least 10% of our monthly income to go towards things I had no idea I was going to pay for that month.

If you’ve laid out all your payment obligations, fixed expenses, and discretionary expenses and have cash left over to cover the unexpected, great.  If not, you may need to review your spending categories and trim the fat to make room for the 10% Miscellaneous Buffer.