The budget challenge most likely to disrupt your cashflow

Budget for financial freedomIt seems to always happen – a non-budgeted expense shows up some month and throws off your entire budget plan. If you overspent in an existing category that is easy enough to see, understand, and act upon (adjust the spending or adjust the budget amount). But what happens when you get the car insurance bill and you didn’t have it on the monthly budget because it is only paid twice a year? Or when the annual homeowner’s association bill arrives in January? Or the oil change that is needed this month but that isn’t on your budget sheet because it is only a once-every-three-months expense?

Consider a full year of spending in your budget

The first step in putting together your budget is to wrap your head around all of the categories in which you spend, and then figure out how much you spend in each category and when. Figuring out all of this information is not always easy. Some ways to get started include:

  • Your online bank (or credit card) interface. Often you can go back and review at least three months worth of transactions within your online banking interface – some banks actually allow you to go back even further.
  • An online tool like Mint or EveryDollar. These are nice tools for “looking back” at what you’ve spent recently and they also do a fairly decent job of guessing at some general categories based on the vendor. These tools are limited though in that they can only pull what your bank makes available to them. So when you set one of them up for the first time, be aware that you’ll essentially see the same information you would through the online banking interface (though very likely in a better organized and easier to read format).
  • Past receipts – if you have them. That is a big IF there. Many people don’t retain receipts at all; others retain them for a short time (like the trip home) and then discard them; a very small number of people actually save receipts for a month or longer. In my experience, the people who save them longer tend to be business owners who need to track and record expenses to assure proper handling at tax time.

If your online banking interfaces, or manual records, or any other record-keeping you’ve used, doesn’t go back more than a couple of months – you’ll need to accept that some changes will need to be made through the year as things come up that you didn’t initially account for in the budget process.

Some common non-monthly budget expenses include:

  • Annual and semi-annual insurance premiums. Our car insurance is billed twice a year. Home owners insurance, personal umbrella policy, life insurance – once per year. These definitely need to be accounted for in the budget.
  • Automobile maintenance. You’re probably going to get your oil changed about once every three months, and probably have the tires rotated every six months. Of course there are those “special service” intervals – often at 60k miles, 100k miles, etc. You can ignore these but then they wind up costing you more in the longterm, so its better to budget for them and take care of them as appropriate.
  • Property taxes. This isn’t just for homes – most areas also charge property tax on automobiles, motorcycles, boats, etc. and these are almost always billed just once per year. Don’t let this slip off the budget and surprise you.
  • Home and related maintenance. To maintain the warranty on our heating and air conditioning unit we need to have it inspected and serviced once per year. We also have pest control scheduled to do a big check annually and a quick check a couple times per year. Do you have your yard treated for weeds in the Spring? Do you pay someone to shovel your driveway in the winter? Collect these expenses and make sure they are budgeted.
  • Holidays and birthdays. You KNOW these are coming and exactly when – don’t be “surprised” when the time comes to buy some gifts. I’ll admit that when we first started tracking this we were a little surprised just how much we spend in a year on gifts to each other. That awareness is the first big step in making adjustments (if needed).

And there are expenses you can’t time properly in the budget

Those items mentioned above aren’t monthly items but they do happen on a fairly set schedule and you know when to expect them. But there are also a good number of expenses that you know you’ll have, but you don’t always know when. For example, here are a few…

  • Medical expenses beyond monthly insurance premium payments. You know you’re going to go to the doctor at some point during the year, so this really isn’t an emergency and some amount of money should be budgeted for this.
  • Automobile repair. Even with doing normal maintenance, you’ll likely have some things that come up beyond the oil change and tire rotation schedule. It’s nice to have some money allocated to handling these things when they come up so they don’t become emergencies.
  • Pet expenses should be budgeted. Hopefully this isn’t a big item for you, but if you have pets, the reality is that they do cost money. I have one “free” cat who has cost me thousands of dollars over its lifetime (this cat will eat anything, and that’s a problem).
  • How about home furnishings? We don’t spend from this budget category every month – but we do seem to have some things that come up every year. A rug here, a lamp there. Often little things but sometimes they are bigger things too (beds, couches, tables – these things can be expensive!)

So what do you do about these “challenges”?

There are two main ways that these types of variable expenses tend to be handled.

The first is that some people will actually budget out an entire year and adjust the budget amounts for each month based on the timing of different planned expenses, and/or estimated timing of different expenses based on past trends. You can get fairly accurate with this if you really pay attention. Personally this isn’t my favorite though because it means maintaining a custom budget for every single month. To me that just seems like a bit too much hassle for the reward.

A second popular way – and the way I prefer – to handle budgeting of these non-standard expenses is to take an average annual expenditure, divide it by twelve, and add it to every month’s budget. So if my car insurance is $1,200 per year, I’d put $100 each month onto the budget for car insurance. If I know we’re going to plan a family vacation of $3,000 at some point during the year, I can put $250 per month onto the budget.

They only “quirk”, if you want to call it that, with the second method is that some months you are going to be under and some months you are going to be over. Using my vacation example, if you have a vacation planned for June, well your year-to-date budget in that category is going to show $1,500 “underspent” right before the trip, then it will show $1,500 overspent just after the trip. As long as you understand this, its fine. There is nothing wrong with this and in fact I’ve found it is the preferred way to handle most of these types of non-monthly variable expenses.

However you do it, you do need to budget these

It may take time to assure you have every expense through the year accounted for – in fact it might even take a full year if you are just getting into budgeting and don’t have a full year of historical data. These things do need to be budgeted though. These are not emergencies so save your emergency fund for true emergencies that can’t be anticipated.

Having a comprehensive budget that is accurate means you’ll be much more likely to actually follow the budget. If you continually have things that come up that can’t be avoided yet aren’t on the budget sheet, you need to address that and fix it because otherwise it will just build frustration and work against you and your financial goals.

Once you have a solid and accurate budget, you’ll start to experience financial free and the lessoning of so many stress points. If you haven’t budgeted in the past then you probably can’t imagine what I mean, but when you have a budget and know where every dollar is going, you don’t need to stress over buying a burger Tuesday night (because you have a dining-out budget!) and life can be so much more enjoyable. :)

Happy budgeting!