Have you ever been caught off guard by an annual expense that you had forgotten would need to be paid this month? Maybe you pay your life insurance with one payment every year or your dog needs to get shots every 6 months. An unexpected annual bill that pops up in a tight financial month can make for a lot of stress and juggling of bill payments. Who gets paid first?
I had a friend once confide in me that he hated paying his car insurance bill. It was about $600 every 6 months, and that 6th month he was always scrambling to find the extra cash to pay the bill.
Most people hate the word and act of budgeting, but I’ve come to find that putting in a little bit of time up front is worth a lot of stress and anxiety later. It’s a classic example of “an ounce of prevention is worth a pound of pain.” If you can plan ahead for those irregular expenses you wouldn’t have to worry where to find an extra $600 for a surprise bill.
But how can you do this?
Build a Regular Budget
First you need to have a normal operating budget for your family expenses. You need to be tracking your monthly income as well as your typical expenses like groceries, car gas, rent or mortgage payment, and your utilities. Budgeting doesn’t have to be complicated. You can use software or just a piece of paper with a pen. Whichever method you decide on should be whatever works for you. If using a software program to create a budget is frustrating to you, find an alternative method that works better.
Add Annual, Semi-Annual, and Irregular Expenses to Your Budget
Once you’ve come up with your normal monthly budget you simply need to add in those irregular expense items that pop up from time to time. You obviously don’t need to add the full amount to each month of the budget unless you incur the cost every month. For something like a 6 month insurance bill just divide the total amount owed by 6, and set aside that much each month in your budget. The “balance” in this category of your budget will increase for six months, then go away when the bill comes due.
Do this for all of the surprise bills that come your way. Even if you get caught off guard by a bill you had forgotten, the other items you’ve been saving up for can help you offset some of that cost. And every time a bill surprises you go back to your budget to make sure it doesn’t surprise you again in 3, 6, or 12 months when it comes back due.
Built-In Emergency Savings
There are two benefits to this budgeting strategy:
- You don’t have to scramble for funds when the bill comes due.
- You are building up a small amount of extra emergency savings.
How so? Let’s assume you’ve been setting aside extra money for your car insurance ($100 per month), life insurance ($20 per month), and homeowners association dues ($50 per month). (For sake of simplicity we’ll assume all three bills comes due in the sixth month.) You started setting money aside 4 months ago. That means over those 4 months you have saved up a total of $680.
That money has a name — a designated purpose — but if you ran into a big financial emergency in the fifth month, you would have some extra money available to help offset that emergency cost.
What Irregular Expenses Should I Plan For?
Here’s a list of expenses that my wife and I save for.
- Fire and rescue dues
- Car insurance (paid every 6 months)
- Life insurance (for both of us, paid every 12 months)
- My wife’s haircuts (every 3 months)
- Professional association memberships (every 6 months)
- Vision exam expenses (every 12 months)
- Pet exams and shots (usually every 12 months)
We don’t have any kids yet, which I’m sure would add all kinds of irregular expenses to the list.
What would you add to the list?
Photo credit: Dave Dugdale.
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Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.
For me my income tax bill gets included in that list. I have to pay a big bill very soon and I’m not financially prepared because I just chose to not think about it throughout the year. I really should get on a proper budget to better plan for this kind of stuff.
This topic is actually a huge help for a lot of people. People tend to think that they have no control whatsoever on emergencies that pop up every now and then. But actually putting up some kind of buffer (emergency fund, emergency savings) gives that much security (very subjective word). But then again, we should still look into those emergencies because sometimes they tend to stick with you. (for me, a parent gets sick this year, then the doctor decides on annual check up, goes right into your budget).
I have a monthly salary target that will cover all bills and expenses, including savings for the next purchase or repair AND emergency situations. This way, we are confident that we will not be asking friends and relatives in case we get into an emergency situation.
You never want to be caught in a rainstorm without your umbrella.
By the same token, one should plan for the financial rainy day. What extras can I expect? needs to be asked repeatedly. You cautioned us to prepare for our irregular expenses. Many people bounce checks when they fail to do so.
This is how we save for new cars!