Budgeting 101 – Part 3 of 5
Budgeting 101 – Part 3 of 5
In this Part of our series, we will discuss annual expenses; we reviewed monthly expenses in Budgeting 101 – Part 2 of 5.
Like monthly expenses, most annual expenses are predictable, at least to the extent that you know they will happen.
Sometimes the amount is uncertain or discretionary (you set it – requires some internal fortitude to manage). Annual expenses are recurring and include birthdays, Christmas, vacation, insurance, property taxes, vehicle licensing, vehicle inspections, etc. For the most part, these expenses are living expenses that you need to understand and deal with.
I think that the best way to deal with annual expenses is to make them into monthly expenses. Expenses like insurance or property taxes; are easy to set-up monthly payment plans.
Other expenses only get paid annually, so you can’t set-up monthly payments, but you can save for them monthly.
Take Christmas, for example. You need to set a budget so you don’t get carried away. Fix how much you will spend on each person and add it up then divide by 12. Now you know how much you need to save each month.
However, if you are starting your Christmas budgeting in June, then, for this first year, you only have seven months to save, so you have enough for December.
Make a spreadsheet; list the annual expenses down on the left side and the months across the top. Put negative numbers in the months where the money gets spent. Fill in the months before the expenditure with how much you need to save each month to have enough money to cover the expense.
Save the money for your annual expenses in a separate bank account, so the money is there when it is needed. The interesting thing you will find with this exercise is that there will likely be a surplus of funds in the account at any point in time, and this can be a bit of an emergency fund when required, but if you spend the money, you need to replenish it quickly.
Now its time to face the truth. Is your monthly income sufficient to cover your actual monthly expenses and the monthly allocation of annual expenses? If not, you have a problem.
You need to pay these expenses with income and not credit, or you will be going backwards. If you are in negative territory, roll up your sleeves and start looking at each expense to see how you can cut them back to balance your budget. It doesn’t have to be an immediate fix, but you need to work it.
There should be a surplus so that you can deal with saving for retirement, the lumpy expenses (we will review lumpy expenses in Part 4), and to provide some cushion for the potential catastrophic events.
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