This blog is useful for parents/ to-be parents that plan to have their children stay with them.
Pre-read: Expense Trending & Budgeting – Myfinancejournal
You have now created a detailed expense categorization and have trending data for past 12 months. Now you are ready to use this data to predict spending for the next 3 months. If you have done a trending of several years, you may want to use rolling 12 month average, maximum spend or cyclical spend criteria to determine how the next 3 months would look like and track it closely.
This assumes that there are no significant material changes to your lifestyle. An example of cyclical trend is that you may make more expenses during the holiday season or when you take a vacation with family. This will increase your balance amount due to your credit card company. Keep a close watch on these trends and ensure that you would spend only as much as your income would allow.
Once you have created a solid data of your spending patterns and correctly categorized them you would be in a position to run several what-if scenarios backed by real data and take key decisions on future events. If you were able to collate data for about a decade, you would be able to determine the impact of lifestyle changes to your finances. I will briefly describe an example of how spending varies at different stages of your child’s upbringing till the time they go to college and start staying independently.
Child Birth & Toddler
This is the period from conceiving your child till her toddler years. You will see an increase in medical expenses, groceries, pharmacy. Expenses like travel, entertainment, gas would reduce. Shopping expenses would morph from spending on self to spending on child.
Preschooler
Newer expenses get added to your category list while raising a preschooler. The expenses slowly start to creep up due to an addition to your family. There is an increase in medical expenses, child care expenses, shopping, groceries, pharmacy and this will impact your savings and investments. This is usually the time when you would start special purpose investments like 529 plan. This is also the time when lot of parents consider insuring their life as they realize the need to financially sustain their family in case of an eventuality. Entertainment as a category would change from baseball games to watching kid movies.
Elementary Schooler
During these years, the schooling expenses reduce if you enroll your child in a public school. If you chose a private school instead, this expense will increase. A new category of Recreation and Fitness gets added where you would enroll your child for extracurricular activities, other categories like shopping, dining, travel, entertainment start trending upwards again and take further toll on your savings and investments.
Middle & High Schooler
Extracurricular activities, dining, shopping, entertainment trend up steeply. Home improvement and bigger purchases need to be put on hold. This usually coincides with you peak at work or business and your income levels would increase. By this time, you are more familiar with your finances and can optimize your expenses to adopt to higher spending. This is also the time where you would need to set aside savings to fund your child’s higher education and other expenses like marriage. I am assuming you are a good parent and would not let your child start off his/ her life under debt.
Collegiate
Usually your child would leave for college. You will definitely spend on your child’s college and lodging & boarding but will start saving on other expenses when he was staying with you. Entertainment and child care expenses will start trending down. Your investments will start reducing for you to make money for the additional big spends for your child’s college. Hopefully by this time, you have already invested wisely and your money is working for you and generating an additional source of income (through dividends, interest, capital gains).
Conclusion
The purpose of this blog is to give you an indication of looking into your future and being more aware of your spending in the current or subsequent years. This will help you plan your savings and investments better.
