Budgeting is an essential tool for managing expenses and realizing financial goals. And it’s relatively easy to budget for regular expenses, like rent or mortgage payments, utility bills, and groceries. It’s the unexpected expenses that bust most budgets — things like car repairs, veterinary bills, and medical expenses.
But most of the expenses that threaten to bust your budget and put you in credit card debt aren’t truly unexpected — they’re just unplanned-for. These include expenses like holiday and birthday gifts, quarterly bills, home maintenance costs, and property taxes. And you have to budget for these, too. In order to do that, you’ll need to figure out how much you’re spending on irregular expenses each year. Then, to cover the expenses that truly are unexpected, you should build an emergency fund.
Include Irregular Expenses in Your Monthly Budget
Most budgeting software allows you to track and limit your spending in different categories throughout the month. For example, you can use pre-set categories, like food, housing, and utilities, and create custom categories according to your needs. One of those categories needs to account for irregular expenses — those bills that don’t come up every month, but need paid yearly or quarterly instead, and may get left out of a monthly budget as a result. These expenses can run the gamut from seasonal costs, like holiday gifts and landscaping, to yearly property taxes or quarterly self-employment taxes, to home maintenance costs. They can also include large purchases that you’ll need to save up for, like a new appliance, a new car, or a bathroom remodel.
In order to plan for them, you need to create a sinking fund into which you’ll put the money you’ll need to pay those bills when they come up. But you might not always know exactly how much you’re going to need in advance for all of these expenses.
One way to find out it is to look back over your spending for the past year. Most robust budgeting software offers an historical reporting feature that allows you to look back over your expenses for the past year. Ferret out all the expenditures that went to irregular expenses — medical copays, home maintenance and repair, car repairs, and so on — add them all up, and then divide them by 12. That’s how much you need to set aside in your sinking fund each month for your irregular expenses.
Of course, you should adjust the calculation a little to account for those irregular expenses that are closer on the timeline — because you’re probably not doing this on January 1. If it’s already July, and you need to set aside money for Christmas shopping, divide that expense category by five to play catch-up.
Build Up an Emergency Fund
A sinking fund can take care of all your irregular expenses that don’t come up every month and may get forgotten about when you’re making your monthly budget. But what about those expenses that you truly couldn’t foresee — like medical bills after a sudden illness, cleanup costs after a big storm, or a loss of income? For those, you need an emergency fund.
If you don’t have any money set aside for emergencies, that needs to change. Otherwise, a single accident or breakdown could leave you drowning in credit card debt. Ultimately, your goal should be to save up three to six months’ worth of expenses in an emergency fund, in case of a loss of income. But to start with, set yourself a goal of $1,000.
And, when an unexpected expense comes up, don’t dip into your emergency fund until you’ve determined that the expense in question is a genuine emergency. Has your car broken down and left you without any other transportation? That’s an emergency — but if you could take the bus for a month or two while you save up to cover the repair, it’s not. If you possibly can, avoid spending your emergency fund money and save to cover large expenses, or use your sinking fund money if you’ve already put away the money you need.
Budgeting for unexpected expenses won’t always protect your budget — sometimes we come up against financial obstacles that can’t be surmounted. But planning for the unexpected means you’ll be prepared to cover most bills that come out of the blue — and it’ll put you in a much better position than you’d otherwise be in.