Monday, August 26, 2013
Project Management and Budgets
Monthly budgets are for monthly expenses or predictable infrequent expenses like property taxes and car insurance. The emergency fund is for emergencies. Eventually, if you are diligent, you will outgrow the need to tap the emergency fund for most “emergencies.” What about expenses that are not predictable but are not emergencies? When buying a new house I started with a budget in mind, $180,000 to $220,000. I overran this budget by a little less than 5%. I am satisfied. In picking a price range Zillow gave me a pretty good idea of what I was getting myself into. I was somewhat familiar with the Greenville area before starting the process. As I did my research and explored neighborhoods with satellite imagery and actual feet on the ground explorations with a realtor, the final picture came into pretty sharp focus. We learned that the lower end of our initial range was unrealistic give what we wanted in our new house. As our data base of actual houses and asking prices grew, we learned the upper end of our range was pretty accurate. There was another aspect to purchasing a new house, the move. To be honest I had no idea what this might cost since I had never done such a thing. So I proposed and funded what is known in the project management world as a SWAG (Scientific Wild Ass Guess) of $20,000. It turned out that the components of my estimate were not particularly accurate but the total looks like the total it is going to be just about right. I thought moving our junk would cost about $10,000 based on conversations with coworkers. I thought repairs and upgrades to our existing property might run another $6,000 given conversations with my realtor and my favorite contractor. The move from Maryland to South Carolina actually cost $6,000. I kind of sort of included the cost of the move from the storage unit in Atlanta in the total estimate but it was more expensive at $1,500 than I expected. Fixing up the old house is pushing past $9,000 so those estimates were low. Our realtor in Maryland insisted we leave our washer and dryer with the house. That lowered the cost of the move on one end but tacked on $1,200 to the other end. I still need to get the inside of the garage painted and the deck sealed. Would those be part of the cost of the house or the cost of the move? So I am closing in on $18,000 with a few unknowns lurking in immediate future. I am satisfied. When funding “projects” that do not require the use the emergency fund, try to make a realistic estimate, knowing that you could easily be off by ±15%. Even if you think you know what you are doing add 10% for contingencies to your projected budget. If you are working with a number of unknowns add 15%. If at all possible organize your project so that you can fund, completely execute a part of the project, and then stop if you discover that you have really blown the estimate. It happens. I still have an official 6 months take home salary emergency fund based on my salary during the last years before I retired. It sits in a CD that rolls over every 6 months. I hope I never need to use it, but I keep it to remind me that the world is an unpredictable place and I am a fallible human being. Even if your net worth falls in the $1,000,000-$5,000,000 range, I would recommend leaving your emergency fund in place. If your net worth exceeds $5,000,000 I think you have outgrown the need for a formal emergency fund. May all your projects and all your investments be blessed with success.