Over the past three years, I have been slowly refining the process that I use for budgeting. I started, as most people do, with first tracking our expenses in a spreadsheet because we had to know where we were spending money before being able to re-prioritize our spending. It eventually turned into a fun game that I play trying to improve the reporting functions with my spreadsheet while minimizing the time involved.
While I like to keep my budget simple, I also like it to be as precise as possible. One of the ways that I have maintain a balance between simplicity and precision is to avoid planning for irregular expenses. My wife and I currently make enough to give us a few hundred dollars of a cushion each month over our regular spending and investing. This normally meant that any irregular expenses that would come up would be covered with this cushion. For example, we bought new tires for our car this year and it was covered with this money. I used to think this was the best route to go. After all, we didn’t spend more than we earned that month, and it didn’t require any additional planning.
Why Irregular Expenses Can Ruin Your Budget
Making my way through college, I didn’t have the same financial cushion that I do now. Yet, I still found a way to make ends meet. This meant temporarily sacrificing a healthy diet in order to save a few bucks getting through college along with other frugal tips. I still look back on that time and wonder how I made it through without taking on any college debt, but it ultimately comes down to being forced to find a way to survive.
In my opinion, the main reason that people (who earn a decent wage) struggle financially is because they believe they earn enough to slack on their budgeting commitments. I know this to be true because I’ve seen myself relax on my commitment, despite my interest in personal finance. Somehow thoughts like, “I earn enough that I don’t have to worry about budgeting,” or “I’ve always found a way to pay for it in the past, so it shouldn’t be an issue…” creep into your subconscious when you start making enough money. It’s this false sense of financial security that hurts us. Before you know it, you can find yourself spending more than you earn.
Failing to plan for irregular expenses contributes to this false security. While it may be making your time commitment to budgeting smaller, it is setting yourself up for failure. There are many irregular expenses that alone will cripple your monthly budget. Imagine how you might handle these issues if they occur in the same month.
A great example is car maintenance. Let’s say you have a car that is paid off. At any given point, your engine could die on you, needing to be replaced or worse, forcing you to buy a different car. I don’t know about you, but I don’t have thousands of extra dollars from one month’s earnings. Even if you have an emergency fund, by not planning for this expense, you are stuck scrambling trying to make ends meet while also being without a car. This sounds horrible, but it can be easily avoided.
How to Budget for Irregular Expenses
Unusual expenses will pop up from time to time and it is up to you to plan for them in advance. This may mean that you have less money to play around with, but at least you don’t have to stress when there is an unexpected expense. The process for budgeting for irregular expenses is quite simple. You take the future cost and divide it by the number of months that you have until you might expect to need the money. This will give you how much you need to save each month in order to prepare for these small instances. Let me give you a couple examples:
Example 1: Planning for a Newer Car
My wife and I currently drive a used car. I know that it isn’t going to last forever. Based on reviews, I assume that I have at least 4 more years of good driving with the car before any major maintenance issues. I may have a couple unexpected issues before then, but nothing significant. Let’s assume I want to sell my car in 4 years and buy a newer car. This means that I need to save the money that I will need to buy a newer car four years from now.
Future Value = $8,000 (this may change, but it will be much easier to get a new car with this amount already saved)
Months Until Expense = 48
Monthly Savings = $166.67
By saving $166.67 each month, I can have $8,000 specifically designated for a different car.
Again, you don’t have to be strict with it, but by being pro-active, you prevent yourself from being in a bad position years down the road. You don’t necessarily need to separate your saving accounts into sub-accounts, but if that helps you visualize your progress, then by all means do that.
Example 2: Moving to a New State
My wife and I are also planning on moving to a new state in about a year and a half. This means that we will face new expenses at the time of the move that we don’t normally experience each month. In order to prepare for it, I can start saving now to alleviate the challenge in the future.
Future Amount = $2,500
Months Until Expense = 18
Monthly Savings = $ 138.89
By saving $139.89 each month, I can make sure that I have enough money to pay for all of the related costs for moving.
Budgeting Means Looking Forward
By preparing for these expenses ahead of time, I get a more accurate picture of where I should be saving my money. It prevents the irregular expenses from surprising me and helps me prioritize saving now as opposed to spending the money that I think I don’t need right now. While I used to think that planning more would be more of a hassle, I realize that saving ahead of time is much easier than scrambling to make ends meet when a huge expense comes.
Do you budget for the irregular expenses? How do you do it?
This post was written by Corey, a staff writer from 20’s Finances.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.