Imagine it. You've been pursuing budgeting perfection for months, maybe even years, where you are able to stay within your budget amounts for your expenses, you are saving what you planned on saving for the month, and your income is what you expected it to be. You are on the verge of having THE PERFECT MONTH.
But then... you realize you've forgotten something. You check the calendar. Is it? Yes it is. Your car insurance premium is due in a few days. And it's $600.
There go your planned savings for the month and then some. Why didn't you see this coming?!
Does this sound familiar to you? I've been there and it's frustrating. It took me some time, practice and a good banking setup to figure out how to account for irregular expenses.
What are irregular expenses?
Irregular expenses are costs that you generally know will happen. Oil changes, insurance premiums, vehicle registration, birthday gifts, holiday gifts and more. You know these are going to come out of your budget and you usually have an idea as to when.
Step 1: If you already have a budget in place, look at your spending for the last year and note all of the expenses that came up that you know are going to occur repeatedly, even if not regularly or monthly, and note what each one is, when you think it will occur (if you can), and what your spending was.
If you don't have a budget, now is the time to start. My preferred tool is YNAB, but any tool that YOU use consistently is the best tool.
How do you set aside the money in your budget?
This is a two-step process. Step 2 is to get you to a normal budgeting schedule for each irregular expense. "Normal" means you are setting aside enough each month to pay for the expense when it happens. Some expenses might be annual, some quarterly. It may take you a full year to get every single irregular expense to a normal cycle.
For Step 2, take your first irregular expense and identify when the next payment is going to be made. If you don't know exactly, make your best guess. Divide the total amount you would spend for that expense and divide it by how many months are left until that anticipated payment.
You need an example? Of course. Let's take your vehicle registration fee. It's $78 and due in 3 months. $78 divided by 3 is $26. So for the next 3 budgets you will set aside $26.
Repeat this for each irregular expense until you have all of them budget for.
A word of caution. Your budget will feel VERY tight during Step 2 as you play catch up. But it will gradually loosen as you get your irregular expenses regularly budgeted for and your budget reflects your true expenses.
Step 3 is maintaining your budget and regularly planning for irregular expenses. After you pay for that vehicle registration, you will then take that anticipated $78 expense and divide it by 12 as it will be another 12 months before you pay that expense again. $78 divided by 12 is $6.50 and that is what you budget for each month from now on for vehicle registration.
How do you keep from spending your irregular expenses money?
It took me some time to learn this trick, and I'm glad I did. Step 4 involves using a separate bank account (a savings account, for me) to move your irregular expense funds into. At the end of each month, I add up how much I did not actually spend on my irregular expenses and move them over to this savings account.
When I have an expense, I move that money out of my irregular expenses savings account into my normal checking account to cover the payment.
This takes a little bit of extra work each month, but it keeps me "honest" and prevents me from spending that money on other things.
That's it! Four steps and time is all it takes to ensure you are never surprised when those "regular" irregular expense come around.