How do I budget irregular & unplanned expenses?
Establishing a written budget doesn’t guarantee your money will act according to that plan. Paying routine, monthly bills like rent and car payments is easy. You just pay the same amounts at the same time every month by writing a check or using online bill pay. Most folks know what these amounts are and easily account for them.
But things start to get messy once we consider irregular and unplanned expenses.
Irregular and unplanned expenses are things like property tax bills, healthcare, car repairs, dining out, and groceries. The list is endless. But essentially, these are the expense items that crush budgets because they disrupt the regularity and simplicity of things, resulting in many of these expenses being paid reactively on credit cards.
The best way to avoid this is to create a “smoothed out” budget, which essentially means accounting for all expenses monthly. So, if your property taxes aren’t due monthly, but are instead paid twice per year, you’d just budget 1/12th of the annual amount for your monthly budget.
You’d do the same for things like Christmas gifts and major home repairs (think water heater, air conditioner, etc.). While these amounts may not be as fixed in number as property taxes, you can still take an annual estimate and turn it into a monthly figure. This way you’re better prepared for those expenses when they pop up.
The key, then, is to turn your budget into an active spending plan. That way you ensure the math happens. By creating the above budget, you should know what your monthly expenses will average over the course of a year. From there, you just transfer that amount to your checking account on a monthly basis. Then each month, pay the bills that are due. Some expense and bills won’t happen every month, so your checking account should increase in its carried over balance. Don’t consider this to be savings…it’s just money that you know will eventually be spent that hasn’t gone out yet.
You know the car tires will eventually wear out. You know Christmas comes every December. So don’t be caught by surprise! Budget for these items each month, then the funds will be sitting and waiting in your checking account to pay for the expenses when they arise.
Don’t worry that you’ll be carrying a running balance in your checking account and not earning much interest, if any. The key is to account for all expenses and have money waiting. That way when your air conditioner goes out at the same time your kid has to go to the emergency room, you can actually worry about the health of your child without concern over the looming medical bill!