Is it just me or does it seem like almost everybody today is stretched to their max? We are so busy that we never get a chance to enjoy what we are actually doing because we have to get ready to run to our next event. I also see it all the time with our finances. We have one little financial bump in the road, and it sets us way back. That’s because we usually have no margin in our lives.
I was reminded of the importance of having margin in our financial lives last month when I saw an article detailing the anticipated increase in employee health insurance premiums for 2014. Next year alone, employees on average will see a 10% increase in their monthly premiums. What was also interesting to me was that over the past 10 years it has increased a whopping 150%!
This is important because health insurance is a major component of a healthy financial plan and it is not recommended that you go without it. So when your premium does increase, you have to change your monthly spending to reflect that increase. However when there is no margin in your finances you struggle to stay afloat financially and there is a tendency to start to rob Peter to pay Paul. To pay for that increase in necessities you cut back on your retirement contributions or put the overflow on a credit card or a home equity loan.
To combat that I recommend that you build some margin into your monthly budget. How much you ask? It’s a good question and it will depend on a lot of factors including your income. But as a rule of thumb, I say have 2% of your monthly income as margin in your monthly budget so your finances don’t get turned upside down in case of an increase in a necessity. For example if you make $4,000 a month, leave $80 a month in your budget as a buffer against an increase in insurance premiums, a spike in gas prices, or an increase in your grocery budget. Then put the $80 in your budget as something you won’t miss if you have to start spending it on an increase in necessities like extra money into your 401(K), paying down your debt, or cash savings. By having this buffer, you are preparing for the inevitable, an increase of price in goods and services, but are protecting yourself from having a financial crisis on your hands.
I don’t like paying for an increase in insurance premiums any more than you do but by having margin in my financial life I don’t feel the sting as much as some people. If you are tired of feeling the pinch in your monthly budget each month, try adding some margin into your financial life and see how it improves your finances.