Preparation
Now that you’ve finished the first two steps (if you’re new to this series, please start at the beginning), recording your finances and budgeting, we are ready to start thinking of those oddball expenses that don’t happen every month. Your normal budget is excellent at helping you control your money from month to month. You have a decent idea how much your light bill will be, what you need to set aside for rent, and how much you want to spend on extras like dining out, but what about those irregular expenses?
Irregular expenses can be disastrous to anyone trying to tame their money. I’m not talking unexpected expenses, that’s what an emergency fund is for (emergency funding will be part 4 of this series). These are expenses that you can anticipate and know are coming down the road.
I have a garbage bill, but it is every 3 months. Christmas comes every year, but I don’t want to have to set aside all the money I need for gifts from my December income. How does a dollar tamer handle this?
Gathering Information
Just like in the previous step, we need information to proceed properly. Gather up these irregular expenses and get the dates they are due and the amounts. Some common expenses of this type might be insurance policies, garbage service, subscriptions (magazine, AAA, etc).
Preparing the Budget
Take each of your bills and divide the bill amount by the number of months between payments to determine how much you need to set aside each month for this bill. For example, say you have a bill that is $60 every 3 months. You will have the money ready to pay the bill when it comes due if you set aside $20 each month.
Do the same for things such as Christmas gifts or vacations. Just estimate what you want to spend and how many months until that goal is due. Divide the total you are budgeting by the number of months before you plan on spending the money and you have your monthly amount to set aside.
Do this for each expense, adding a line to your budget and inserting it into the budget. Just like in the previous lesson, total and compare your budget when you are complete to make sure you have enough money to cover everything. If you don’t, you’ll need to see what you can trim to make ends meet.
Goals
This same technique can be used for saving for larger goals. Let’s say you want to buy a $5000 used car in 3 years. Divide $5000 by 36 (the number of months in 3 years), and you will need to save about $139/month to meet that goal.
Compare this to buying the car on a 36-month loan. If you save yourself, you spend $139/month. If you put it in a nice interest rate account (such as a 2.75% interest ING account), you would have $5209.99 at the end of 3 years. Getting a 7% auto loan (a pretty good rate) would cost you $154.39/month. After 3 years you would have paid an extra $558.04 in interest. In the end, taking a loan instead of saving would cost you $768.03 on a $5000 car! You can see how a long-term budget plan can pay off!
Setting the Money Aside
Make sure you keep a running total of what you have set aside for later expenses. You need to be aware that some of your account is already allocated if you keep the money in your main checking/savings account. You don’t want to see $2000 in your account and think you have money to buy something only to remember later that you set that money aside for vacation.
What works best is if you can make a separate account to set the money aside (you can do this in an ING account). Then you can have an account that you know exists for a specific purpose and how you are proceeding towards that goal.
Discipline
Don’t forget why you are doing this. It is easy to want to splurge on something and justify it by saying “oh, that isn’t coming for a few months.” Don’t do it! Stick to every part of your budget and you’ll keep your money working for you!
Posted under Budgeting, Series
Written by Matt on October 24, 2008
