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When to blow the budget!


Picture showing various graphs scattered on a desk

Every person that has well run personal or business finances works to a budget of various simplicity or complexity. Whether it be how much you are prepared to spend on a holiday or a complex graph of forecasts targeting income against expenditure.


However, there are times when it can pay to spend more than you budget for - I will give three examples:


The first example is a personal one. In 2019 I entered the local car dealership intending to spend £6000 on a fresh car. I used to do high work miles so in the past I purchased cars around ten years old with low mileage so that I did not lose out on depreciation, but still had something reasonably reliable. This had worked well for me. However, it meant when buying a car I always ensured I had a spare £1500 in the budget in case I bought a bad one, luckily this had never been the case. I would often have some more expensive jobs such as a cam belt or clutch to replace during the cars history with me. Now, being redundant, I was going to have a period of three years before I planned to start drawing my pension, so I was planning that period to a budget. The car I purchased also had extremely goof fuel consumption slightly better than the older car I had looked at. I blew the budget and ended up spending £5000 more than planned on a six month old car with low mileage. However, this did pay off as both the three year warranty (which I did need to use) and the servicing costs were substantially less than they would have been. Ironically, due to the drop in production, the car currently has nearly the same value as I paid for it. This for me proved a good decision as it reduced ongoing running costs.


The second example is a business one: This firm builds a factory and at the time of construction it is considered whether to build a stronger roof and install electric solar panels. As this falls outside the firm's budget a decision is made not to do this. Within three years energy prices have increased and the firm has to spend money on strengthening the roof and installing solar panels. Bothe the cost of doing this and the cost of the solar panels has increased in that time, let alone the inconvenience, but it still makes commercial sense. The simple fact is that if the original budget had been blown the business would have had a lower capital expenditure and have had three years benefit of reduced cost energy.


The third example is a farming one: The farm manager is going though the budgets and plan for the next five years with the farm owner. Within that plan are several capital expenses spread over the five year period including the purchase of equipment and investment in land drainage in the fifth year. The owner asks why the equipment purchases and land drainage in year five are needed. The farm manager explains that the new equipment will reduce costs and the land drainage will increase yields and resultant income. The farm owner then asked why those budgeted spends were not in the first year. The farm manager explained that this would blow the budget for capital expenditure. The farm owner turns around and says, "Yes, but we will then enjoy cost savings and increased yields five years sooner."


The lesson behind these examples that there can be good reasons to blow the budget. This is particularly true in times of inflation where if you chose not to spend money today you may have to spend considerably more in a few months time.


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