You’ve got a monthly budget and you stick to it — that’s great! But have you accounted for all of your life expenses, or just the ones that come up every month?
Budgets are essential tools for anyone who wants to manage their money responsibly. A budget is a strategic plan that determines how you’ll spend the money that’s coming in to your hands on a regular basis. But budgets have some weaknesses: Because most people build their budgets on a weekly or monthly basis, it can be hard to account for some expenses that come around less frequently. And if you haven’t accounted for an item in your budget, you may have a hard time finding the money to pay for it when the time comes.
The answer to this is to identify these irregular expenses when you do your budgeting, and figure out how much they’ll cost you in a year. Then do some math to prorate those expenses across the months or weeks in the year, and deduct that amount from your monthly or weekly budget. Use a “set-aside” savings account to keep that money separate from your regular checking so that you don’t accidentally spend it. If you know what expenses to look out for, this system will work perfectly.
So, what sorts of items do you need to plan for in your set-aside budgeting? Here are five items that are common for many people.
1) Annual Dues or Fees
Though many things like our rent, mortgages, utilities and other bills are paid monthly, there are other things that you may only have to pay once a year. This varies widely from person to person, but you’re likely to encounter some kind of annual fee sometime in your life. It may be dues that you owe to a homeowners or renters association, membership dues to AAA or another organization that you belong to, or some kind of union or social club dues. You can budget for any fees assessed annually by saving a little bit each month in your set-aside account.
Taxes are one of life’s inevitabilities, but we don’t always account for them well in our budgeting. While your main income taxes are most likely deducted from your paycheck by your employer (unless you’re self-employed), there are other taxes that you may have to pay out of pocket. In most states, for example, you have to pay property tax on any cars you own once a year when you renew your registration. You may have to pay property taxes on your home as well (if your mortgage company doesn’t automatically collect them). And if you’re one of those people who ends up owing more on their income taxes than what is withheld during the year, you need to be budgeting for those additional payments too.
You’ll probably end up doing some kind of travel during the course of a year, and you need to make sure that you have money budgeted for those trips. If you have the resources, you might take a nice week-long vacation with your spouse or kids every year. But even if you’re not taking big trips like that, you’ll probably have to make a trip to visit family or attend a friend’s wedding from time to time. The cost of transportation, meals and lodging can really add up, so make sure you allot some money for travel in your set-aside budgeting to keep these trips from becoming financial emergencies.
Christmas is the perfect candidate for a set-aside budget item. You know that you’ll want to spend money on gifts for your friends and family, but it’s unlikely that you’re thinking about that spending in May and June. In order to have cash on hand for Christmas so that you don’t have to go into debt to buy gifts, decide when you plan your budget how much you want to spend on the holidays, and then save a little bit every week or every month so that you have the full amount you need in cash when the Christmas season arrives.
5) Home and Auto Repairs
Unless you live in a brand-new home and drive a brand-new car, you’ll probably have to pay for some repairs throughout the year. (And even brand-new homes and cars sometimes need fixing.) Although some issues can be so costly that you’ll have to dip into your emergency fund to cover them, others — like replacing your tires or hiring a plumber to fix a leaky faucet — are relatively inexpensive. You can make and educated guess as to what you’ll spend on small repairs like this throughout the year, and then budget for those expenses using your set-aside strategy.
With some forethought and a good calculator, a set-aside saving strategy will help you budget for these items and keep you from panicking when these expenses come up each year.
Photo by Steve Garner. Used under Creative Commons License.