User Question – How do you handle “fixed” costs like electricity that can change a lot from month to month?
A lot of fixed costs really are the same each month. Your mortgage or rent, Netflix, Hulu, Disney Plus, Car payment, etc. You know the moment you sign up exactly what the price will be. But some expenses can be a little harder to figure out. Utilities like electric and gas can often swing through a pretty wide range throughout the year.
The simple answer is guess on the higher end. But that can be mentally hard to do. Every dollar should be used to it’s fullest and guessing high just means wasting money most of the year when the bill is much lower. And to that we would say, “Well…..kind of. It isn’t actually that bad.”
The Happy Giraffe Budget is, by design, conservative. We value peace of mind over using every dollar to its maximum potential. Which might sound bad at first, but it’s saying that we understand that you are not a perfectly rational robot. You are an emotional human. If you were a robot, then any budget system would work. You would always pay off the debt with the highest interest rate first. If your mortgage is lower than the return you can get in the stock market, then you would borrow every penny you could against your house and put it all on the next big stock. You would do that because those would be the most rational choices to maximize your money’s use.
An article in the Atlantic put it this way:
“Classical economists used to posit that, since consumers are rational, we make decisions to maximize our pleasure, end of story. But your paper reviews all the ways we know that consumers aren’t in fact rational but prone to all sorts of biases and habits that pull us from any strictly rational view of the consumer.”
The irrational Consumer
Because you are an irrational, regular person, it is OK if you budget on the higher end, because that provides the peace of mind and security you really need.
Utilities
With that said, how do we handle things like utilities? There are a couple ways.
The easiest is if you can work with the utility company and get on a yearly set fee plan. They may not all do this, but many will look at your spending for the past year or so, and charge you one set price every month based on what you will probably use. They often don’t charge you anything more to do it this way. So if they can do it for you, this is the easiest and quickest option.
Another option is to group gas and electric together into one fixed amount. Many times, electric bills go up in the summer when gas bills go down. In the winter the opposite happens. This may not happen in your case, but if it does, this can help even out the swings that happen.
When you can group them like this, we still suggest budgeting on the higher end. For months when you guessed high (which should be the majority of the time), you get a bonus! (We are usually boring and put that into a short term savings account.) But you can also see it as a present for doing so well at budgeting and spend it however you like! For months when you have guessed low, pull the extra you need from short term savings.
In General
In general, the guess high method works well for lots of things. We use it for car insurance that we pay every 6 months, car registration fees that happen each year, the water bill, and a few others.
It is always nice when you guessed too high. It’s free money you get for being responsible! That’s why The Happy Giraffe Budget works well. It was made for real people who need a surprise bonus every now and then.
Other Ideas
What ways have you found to handle “fixed” costs that change? What other questions do you have?
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