The Key to a Well Prepared Spending Plan…

Do you sometimes find yourself facing an upcoming budget expense and wondering, “How am I going to pay for this?” It may have been an unexpected expense, or perhaps you even knew the expense would be coming up. Did you find that you had to dramatically cut back on some monthly expenses so that you would have the needed cash?  Maybe worse, did you put the expense on a credit card, or dip into your savings to get money?  Have you ever gone as far as to skip paying one bill so that you can have enough to cover the other expense?

If you have ever found yourself in that situation, be it occasionally, several times a year or perhaps on a regular basis, then tIf youhere may be an important part of your spending plan that you are overlooking: Periodic Expenses.

Periodic Expenses are those budget costs that come up once in awhile, or perhaps once a year. Although you may not see these expenses every month, they are there, looming on the horizon of your spending plan.  Like a furious storm, they can quickly wreak havoc on your budget.

So how do you go about heading off potential problems or disasters to a balanced budget?

 

3 Types Of Expenses You Need To Know

There are actually three types of expenses in your spending plan. In addition to Periodic Expenses, there are also Fixed Expenses and Variable Expenses. Fixed Expenses are those expenses that occur in an exact amount every month such as rent, mortgage or car payments. Variable Expenses are also monthly, but the amount will not be exactly the same every month; utilities, gasoline and groceries, for example.

 So what are some examples of Periodic Expenses? Here are a few that many of us have:

  • Automobile maintenance, repairs, registration and insurance (if not paid monthly)
  • Home repairs and maintenance, property taxes and homeowners insurance (if not escrowed)
  • Medical and other health related expenses
  • Travel
  • Gifts and other holiday related expenses (dinners, parties, etc.)
  • Back-to-school (tuition, books, fees, supplies, clothing, class pictures)
  • Memberships (health clubs, motor clubs, warehouse club stores)
  • Donations (occasional giving to charities or other organizations)

 

When I do budget counseling with individuals or couples, the one common theme I see in most cases is that their spending plan is based only on the Fixed and Variable expenses; in other words, the expenses that they know come up every month. Seldom do they plan for the Periodic Expenses. Instead of being proactive with those expenses, they are reactive. They wait until the expense is upon them before they begin to figure out how they will pay for it.

 

Planning for your periodic expenses will make your life a lot easier. Here is a method you can use to be prepared:

 

  1. First, sit down and make a list of all your periodic expenses that will occur once or periodically in the next twelve months. You can use your bank statements from the past 12 months to help you remember those expenses.
  2. Next, assign a dollar amount to each of expense item. What you spent last year likely will be close to what you spend this year.
  3. Once you have assigned a dollar value to each expense, add up all the numbers. You may be a little surprised, perhaps even shocked by the total, but it is part of your budget!
  4. Now, divide that total by the number of paychecks you receive in a year. The answer to that equation will tell you how much you want to save from every paycheck just for those periodic expenses.

 

It seem rather painful to have to turn some of your monthly discretionary income into a savings reserve, but once you get that reserve up and running, you  will fins that you feel really good when periodic expenses arise and you know you have the money ready to pay for them.

 

A few other things to consider for a successful budgeting for Periodic Expenses:

  • Your estimates for some things such as medical care, auto repairs and home repairs are just that; estimates. You won’t be 100% accurate. However, if , for example, you budget $1200 for auto maintenance this year and you end up having to spend $1500, at least you have 80% of your expenses covered which is a whole lot better than zero!
  • You will need to make periodic adjustments to your reserve. Each year, some costs go up some expenses may be eliminated or reduced. You will have to go back and reevaluate your plan from time-to-time
  • Create a Savings Reserve. Once you have determined how much you need to save from every pay check for your periodic expenses, put the money in a separate savings account. Make sure you faithfully deposit the money every month. Treat it like it is a bill that is due every payday!

 

Getting your Periodic Expense Reserve started is the most challenging part. Don’t give up. Make it work! Once you have it rolling along and experience the ease of paying your periodic expenses, you will wonder how you ever lived without it.

Image from jakeliefer’s flickr photostream.

This entry was posted in Budgeting Basics, Rebuilding Your Finances and tagged , on by .

About M. Byrne

Michael Byrne is an Accredited Financial Counselor ® and a practicing personal financial counselor. For the past three years, he has work with the U.S. Military providing personal financial counseling services and conducting seminars to Active Duty Military Personnel as well as members of the National Guard and Reserves. He also has extensive experience with bankruptcy counseling as well as student loan counseling. In addition to his AFC, Mr. Byrne holds a Bachelor of Science in Business from Southern Illinois University Carbondale.

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