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Day 21) Planning Ahead for Big Expenses

Welcome to Day 21 of Where’s My Money Going? Month! This February 2009, I’m challenging readers (and myself) to track spending manually for 28 days. Don’t worry if you’re late to the party, you’re still welcome to join. Consider tracking your spending into March.

One of the things that can throw off a budget the most is known but unplanned-for annual events. Every December, we have to pay our renter’s insurance. We get a couple reminders beforehand and an update, so by the time I prepare the December budget I should be well aware of the expense.

But even if I budget for it, that puts a strain on the budget itself…it has to accomodate $100 extra. If I took a little from each other flexible column, I might not have too hard a time finding that hundred. But what if it was more–for car insurance or if we owned a home?

Some people dip into their emergency funds for this, but it’s really not an emergency. So what is the best way to handle it?

We plan for this kind of thing every month.

Since we bank at ING Direct, we can easily create lots of small savings accounts. So we’ve got one for each annual expense. Every month, we have money transfer automatically from our checking account into each of those savings accounts, about 1/12 of the estimated cost.

That money also goes into the budget, say $7.50 for renter’s insurance. At the end of the year, we transfer it back into checking and pay the bill.

If your bank doesn’t let you do this kind of thing easily, you can also just move a certain amount into savings each month based on the total you’re saving up for (i.e. $7.50 for renter’s insurance, $30 for tire fund, etc). Budget it the same way and keep some sort of record (spreadsheet, document) of how much you’ve set aside for each expense. This isn’t as neat as having the money sorted into separate accounts, but if you’ve got it on paper (computer) that’s good enough!

Expenses to plan ahead for include: homeowner’s/renter’s insurance, car insurance, tire replacement/car maintenance, textbooks (if you’re a student)

So how do you budget for large, predictable expenses? Do you adjust your monthly budget or prepare ahead of time?

This post was part of Where’s My Money Going? Month.


{ 8 comments… read them below or add one }

Caro February 21, 2009 at 10:59 am

I have a number of annual or irregular bills so I realized a while back that the best thing for me to do was to prepare a yearly cash flow/budget. Basically I list every piece of incoming and outgoing money (with a general line each month for our cash allowance). Using excel I can enter in how much I have today at the top and see how much my checking account will have after each event.

I highlight my irregular expenses (insurance, taxes, our special xmas budget). I also set it up so that any amount that is over $300 is green, between 0 and $300 is orange, and below that is red. This way I can scan down my cash flow projection and see where I might need to change how much we put into savings each month.

I tend to update this spreadsheet whenever a bill is paid. The most exciting part is when a bill comes in under my projected amount…then I can change how much is going into our emergency fund. I like doing this often because any windfall gets allocated to savings before it can get sucked into our misc. spending.

Anyway, this is how I deal with non-monthly bills. It’s a bit complicated to explain, but it works very well for me.

Jen February 21, 2009 at 11:01 am

A question about all those ING Direct accounts (or as I’ve seen some people refer to them, “sub-accounts”) : if they’re all technically separate accounts, do you have to report their interest individually to the IRS, or can you consolidate them? I love the idea of little accounts for all of our upcoming planned expenses, but the idea of entering all that stuff on tax forms stops me!

Ken February 21, 2009 at 11:14 pm

We spend 1200/yr every Christmas….we put $100 a month in Christmas club account as credit union.

Suzie February 23, 2009 at 12:27 am

I have many ING sub-accounts (7 or so?). They send one document with all the tax information on it. There is a final (total) at the bottom of the tax form – it wasn’t bad at all!

DIY Joe February 23, 2009 at 11:48 am

Since my budget is new and I had been reading PF blogs for a few months, I included those large “irregular” expenses into my budget. I went the same route as Mrs. Micah and took my guesstimated total for each and divided it out to each paycheck. Vehicle tags, vehicle maint, life insurance, renters insurance, auto insurance, textbooks, haircuts etc…they are all planned for.

Falstaff February 23, 2009 at 1:57 pm

I do a similar thing for my property taxes. I take $25 each week and transfer that into an HSBC online account. At the end of the year, I transfer it back into my checking account and pay the bill. It’s worked well so far.

Diane February 23, 2009 at 6:24 pm

Most of my major expenses are now monthly payments – flood insurance is included in mortgage escrow, along with homeowner’s insurance. I pay car insurance monthly now (used to be annual or every 6 months).

I have an ING account with sub-accounts for certain things. I have a long-term savings (shouldn’t be touched); an emergency fund (for real emergencies); a Christmas fund & short-term savings.

“Short-term” savings is how I cover smaller unexpected expenses – tires; my son’s senior ring (should have seen that one coming & planned for it…); yearbook & sports equipment expenses.

Back in the days before ING, I used the old “envelope method”. Each paycheck or month I would put a certain amount in an envelope for Christmas, car insurance, flood insurance, etc. and log the amount, date & total on the envelope. No interest, but it worked great to plan for coming expenses.

Alison@This Wasn't In The Plan February 23, 2009 at 11:53 pm

We started doing the same thing last year and I love it! We just have one for auto expenses (which includes repair and insurance) and one for everything else (this includes any other random irregular expense that might pop up). We looked at past years to get an idea of how much is normally spent on irregular expenses, rounded up a bit, and made that the goal amount for the accounts. We maxed them out as quickly as we could, as opposed to putting 1/12 of the amount in each month. So far, I’m loving it. The money is there if we need it, and that’s such a comforting feeling!

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