Budgeting 101 – Part 3 of 5
The following article by Robert W. Powell, CPA CA CIRP LIT, was published in the January 2007 issue of the District News. In Part 2, I talked about dealing with monthly expenses. In this Part 3, I am going to deal with annual expenses.
Like monthly expenses, most annual expenses are predictable; at least to the extent that you know they are going to happen. Sometimes the amount is uncertain or the amount is discretionary (you set it - requires some internal fortitude to manage). Annual expenses are recurring and include things like birthdays, Christmas, vacation, insurance, property taxes, vehicle licensing, vehicle inspections, etc. For the most part, these expenses are living expenses that you need to deal with.
I think that the best way to deal with annual expenses is to make them into monthly expenses. Some are easy to do this with like insurance or property taxes - setup payment plans and get them paid monthly. Other expenses only get paid annually so you can’t setup monthly payments BUT, you can save for them on a monthly basis. Take Christmas for example. You need to set a budget so you don’t get carried away. Fix how much you are going to spend on each person and add it up then divide by 12. That gets you a monthly amount. Now you know how much you need to save each month. However, if you are just starting your Christmas budgeting in June, then, for this first year, you only have 7 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 actually gets spent. Then, you need to fill in the months before the expenditure with how much you need to save each month to have enough money to cover the expense. Put the money for these annual expenses in a separate account so that 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 used in this way, needs to be replenished 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 be able to cover 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 individual expense to see how you can cut them to get back in balance. It doesn’t have to be an immediate fix but you need to work it. You should have a surplus so that you can deal with savings for retirement, the lumpy expenses (to be talked about in part 4) and to provide some cushion for the potential catastrophic events.
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