Have you ever been doing a great job sticking to your budget and then your auto license renews and you need a smog check and neither of those items is on your monthly budget? It can throw all your financial progress out of wack. However, these are perfect examples of irregular, but expected expenses.
When we sit down and work out our monthly budget it’s easy to forget the things that only occur once a year or every few months. So I thought I’d share the approach I’ve been using for almost 10 years to help me keep on top of my finances and stay out of debt.
Step 1: Identify irregularly occurring/expected expenses
At least once a year I update my “expected expenses”. This spreadsheet includes:
- Auto license(s), oil changes, expected repairs
- Nursing License, professional organization dues, re-certification fees, scrubs, work shoes
- Blog expenses (domain name renewals, website hosting fees, etc.)
- Bulk meat (can I have 1/2 a pig or 1/4 cow, please?)
- Gifts (birthday, Christmas, mothers/father’s day, weddings, etc.)
- Propane for our RV (it’s much more expensive in the winter)
- Household repairs
- Vet/Pet expenses
So this represents both bills that I know I’ll have on a specific date AND items that I’ll typically pay for during the year but that occurs when I don’t expect them (auto repairs or deductibles).
Step 2: Calculate Annual Total and divide by # of paychecks per year
Add up the total of all these expenses and divide by how many paychecks you receive in a year (Divide by 26 if you’re paid biweekly).
Step 3: Set funds aside from every paycheck
Create a savings account that is only used for these funds. Every 2 weeks, on payday, have your funds auto transferred to this savings account. It’s really cool to see the funds add up knowing that you are prepared.
For example, our washing machine in the RV is only two years old but it is broken and the warranty won’t cover it. That represents $1,000 of unexpected expenses. But we’ve been setting aside funds for RV repairs, so we have 1/2 of that already saved for this specific type of situation.
Step 4: When you incur an expense transfer it back to your checking account.
Personally, I do this once a month, but I know that may not work for everyone. The point is that you have cash available to cover the expense.
How to track this information
I use 2 tools to help me track this information:
- Mint.com tracks my expenses and monthly budget. I have categories that correspond to the categories I’m saving for, so it’s easy to look at Mint to see how much needs to be transferred to checking
- I use a google spreadsheet with two tabs
- Annual Expenses is where I calculate the total amount I need to set aside each year and each paycheck
- Account Tracker is where I track how much I’ve saved for each category. I update this after each paycheck and each time I transfer funds back into my checking so I have an accurate view of how much I have saved for each category.
My “expected expenses” savings account is at Ally.com, an online bank. They recently added a new tool to their savings accounts called “buckets”. It’s possible that this tool will replace my need for the google spreadsheet.
Check out this google spreadsheet template
Here is a template for tracking annual expenses and how much you have saved for each category: Account Tracker Template. There are instructions within the google spreadsheet.