You may have a good idea of where the money is going on a day-to-day basis, but before you start working on a spending plan or budget, it is important to call attention to the top budget breaker: periodic expenses.
Periodic expenses are those that are not paid on a regular monthly basis. For example, both holiday and tax debts are periodic, meaning they are not part of regular monthly expenditures. In that regard, they join the ranks of other expenses such as auto registrations and vacations.
Often, we know when these events will occur, but still fail to plan for them. Unfortunately, when these expenses arise, many people rely upon credit to extend their monthly incomes; using credit this way is one sign of pending financial trouble. To avoid this scenario, follow these tips when planning for periodics:
Determine what you spent last year for periodic expenses. Assume that you will spend at least this amount again this year.
Don’t hide expenses. Just because you don’t list an expense doesn’t mean you won’t have to spend money on it. Don’t forget things like back-to-school expenses, auto repairs, and birthday gifts.
Plan for premiums. Remember that some items, such as auto insurance premiums, may occur more than once a year.
Open a savings account. When you have a realistic idea of what you will need to spend on periodic expenses during the year, divide the total amount by 12 and save that amount each month. Designating a savings account for this purpose may help to organize this process. Check with your financial institution, you may even be able to have the amount automatically transferred.
Here is an example of a periodic expense can impact your monthly budget:
Example: Annual auto registrations
Assume your annual auto registrations cost $800/year. How much should you budget each month to cover this expense (even if you don’t have to pay it monthly)?
$800 / 12 = $67/month
So, to be prepared for the annual $800 expense, you must put $67 each month into a savings account or into an “auto registration” envelope. That way, you will not have to rely on credit when the bill comes due.
Use this simple calculator to determine how much money you need to save per month to cover periodic expenses.
Read what Ashley from Wide Open Wallet suggests for dealing with expenses that sneak up on you.