Budgeting nerd alert!
If you’re brand new to budgeting, it might be a little premature for you to consume this particular content. That's okay, you've still come to the right place.
For those of you who are brand new to budgeting, you’ll want to start with "How To Start Budgeting".
But you’ll probably want to return to this particular article sooner than you think. I just didn’t want you to be overwhelmed by all the detail if you were brand new to budgeting.
Okay, disclaimer finished...
First of all, what's an irregular expense? It's probably easiest to define with some real life examples.
Car registrations, bi-annual car or life insurance payments, Christmas gifts, birthday gifts, wedding gifts, anniversaries and back-to-school supplies are all great examples of those irregular expenses that are just irregular enough to sneak up on you and throw your new-found "budgeting ninja" accomplishments into chaos.
The following two ways to budget for irregular expenses have one end in mind and that is to help you master your money by learning to master your monthly budget.
Learning how to master your monthly budget is critically important no matter where you are in your financial journey, whether you're getting out of debt or on the path to building a nest egg for retirement.
More specifically, mastering your money is not only keeping your 'regular' monthly expenses organized and in check, but more importantly getting your 'irregular' expenses both in line and under control.
This can be a little challenging starting out as you have a lot of 'remembering' to do and you're not always 100% that you've gotten everything down on paper.
"Can't forget those irregular expenses again..."
As you probably have seen or will see, predicting and controlling irregular expenses does not happen by accident.
Rather, it takes time and concerted effort in the beginning to train your brain to see them coming.
To "get it right", we always recommend that you:
1) rewrite your budget every month,
2) think and plan ahead for those longer term expenses and,
3) prepare for the certainty that you'll fail to see some things coming a time or two at first (because you will).
If you do follow these strategies and suggestions consistently, I can promise you that you will eventually have more precise knowledge and control of every dollar that's coming in and going out of your budget.
As a result, you will master your money and be able to achieve whatever your financial goals much more rapidly and with much more confidence.
And ultimately that's the entire mission we want accomplish out with this post, to help you master your money by mastering your monthly budget. So, let's dive into the "how to".
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One strategy we use is to take whatever the expected "irregular" expense is and create a special line item in the budget for it.
Take an annual life insurance premium, for example.
To do this, we take the projected expense amount (i.e. annual life insurance premium) divide it by 12 and put money in that budget "line item" every month.
So, let’s say your life insurance premium is $240 per year and due in the month of April.
What you would do is create a line item in your budget for that particular life insurance policy (in case there is more than one) and budget $20 per month to go into that category.
So, every year when the premium comes due you have already "pre-budgeted" for the expense. You’re not spending that $20 every month, it’s just sitting there accumulating until April, when it’s “grown” to the full $240.
When April rolls around and the life insurance company sends the bill, you can very confidently write a check knowing that you’ve “seen it coming” for the past year and were well prepared for it.
I know, it's like magic, right?!
This is what it would look like on the actual form:
This is where you would budget for irregular expenses. This group of happens to be under the "Personal" category, but you can add irregular expenses to any category in your budget.
"But what if I just started budgeting in January and the $240 is due in April?”, you ask. Great question.
In that case you would want to start budgeting for that immediately in January.
So, you would take that $240 and divide it by 4 months instead of 12. That would be $60 per month that you would need to budget in order to pay the bill.
Just like with budgeting in general, once you start doing it, you'll see that it's not really complicated.
It just takes a little forethought and organization to get it all down on the paper.
Once it's there, you really don't have to think about it any more. The budget form becomes your 'external brain' so to speak.
Essentially, you're just telling 60 of those hard earned dollars you work for every month that their job is to join in with the 180 dollars from the other months.
This will pay that $240 insurance premium at the appointed time.
This is a prime example of one of the pillars of budgeting we talk about so often here: giving every dollar a job in the budget. If you can start thinking of your dollars (or Euros, or pesos, or Yuan) as little workers that you have to give a job, this will totally transform your finances forever.
Another way to budget for irregular expenses would be to create a “miscellaneous” line item in the budget and treat it as a “sinking fund” for all said irregular expenses.
“What’s a sinking fund?”, you ask. Again, great question and let's start with an explanation.
You can think of a sinking fund as a mini-savings account that lives inside of your budget that will fund a (usually larger) future purchase like a roof, a car, a couch or an HVAC system.
Essentially, you "sink" money into a "fund" to pay for something in the future.
Here's an example of a Miscellaneous "catch all" line item. You would use this several irregular expenses in a given category. Again, this is under the "Personal" category, but could be used in any category you choose.
An example of how a sinking fund works would be a situation where you want to buy a new couch and you DON’T want to put it on a credit card (because we’ve already cut all of those up, right!?).
Instead of buying the couch on credit, you would save for it using the sinking fund as a vehicle to prepay.
So, as opposed using the credit card to pay after the fact (plus interest), you're paying with cash before the fact, if you will.
To do this, you would figure out what the cost of the couch is and “make payments” to the sinking fund until you have the full amount.
Then, once you’ve fully funded the category, you can go buy the couch! No debt, no interest, just a new couch. That’s a sinking fund.
So you can look at the Miscellaneous line item as sort of a “catch all” sinking fund for all of your irregular expenses in whichever category or categories you use it.
Honestly, out of the two strategies to manage irregular expenses (individual Line Items vs Miscellaneous), I prefer this one less just because it’s requires less precision in your monthly cash flow plan overall.
With the miscellaneous methodology, you would add up all of your irregular expenses and hopefully somewhat 'overfund' the line item in that category (i.e. the "Personal" category in our illustration here) to make sure you have enough money in it to cover all of those irregular expenses as they come due.
Like I said, out of the two it's my least favorite.
And the reason why it's not my favorite is that doesn't necessarily encourage the precision and granularity of creating individual line items in the budget.
That can often spell trouble for some of the less organized among us. :)
All that said, if it works for you and you're paying all of your irregular expenses, then I say "go for it".
I'm all about what works for you around here as long as it gets you and keeps you out of debt and helps you to build your financial independence nest egg.
We see that when people are starting the budgeting process, a lot of the irregular expenses become an emergency.
This happens when they're not remembered in time (i.e. school supplies or Christmas gifts). Employing one or both of the above strategies helps to eliminate "irregular" from being an emergency.
Think of irregular budgeting categories as little "dumpster" fire extinguishers.
The bigger point here is that, when you employ either or both of these strategies, your budget starts to become more bullet proof. And very few things will ever catch you "off guard".
And again, a huge part of getting to this point is the practiced habit of rewriting your budget every month.
This may seem an odd and a bit tedious idea at first, but the more you rewrite it, the more you'll begin to see its merits.
Rewriting every month keeps you out of trouble, particularly with regard to seeing those irregular expenses coming.
First, rewriting your budget every month will keep the document fresh and alive, because it will be based on the most recent information in your financial life.
It will be informed by short term and long term expenses entering and exiting the document as they arise and are immediately documented in your 'external brain' (i.e. budgeting form), rather than attempting to hold them in your rather imperfect human memory bank.
Practice makes permanent, so practice the right things and them practice them some more.
Second, I want to reinforce the fact that rewriting your budget every month will create such a sense of peace once you've mastered it. And, it won't take long to master it.
There's just no way to overemphasize the sense of peace you'll feel. It is quite amazing and I really do want that for you.
Is it a pain to try remember all of these expenses at first? Of course it is!
But once you’ve done this exercise you’re no longer “surprised” by bills that come in, nor are you scrambling to find the money to pay them.
They become a normal and regular part of your budgeting process. No more drama.
Again, just because an expense is irregular doesn’t mean that it has to be an emergency, right?
We're retraining ourselves to think and plan ahead. You have to do this if you want to win with your money.
In fact, irregular expenses should never be an emergency.
We're going to get you out of that cycle for good.
This one habit alone will change the trajectory of your finances. It will also elevate your emotional and relational well being. It's totally worth it, trust me!
Also, in case you've been wondering how where all this budgeting "nerd-dome" comes from, I wanted to briefly introduce you to our easy-to-follow 8 step debt elimination system.
As you can see, there are a lot of details involved in the process of learning how to budget.
My encouragement is to just start where your are. Make a commitment to stick with it no matter how "messy" it gets.
We normally see people come through the initial "fog" of budgeting after the first 90 days.
Hang in there and use all the free resources offered here. And please don't hesitate to reach out to us if you get stuck.
Imagine what your life will be like when you've mastered budgeting. It's much more blissful, I can promise you that.
Remember, about 95% of our coaching clients ask for help with budgeting as a first order of business. This is the first thing we tackle when we initially sit down with them.
Budgeting is not a talent, it's a skill. Master it and you'll behave your way to debt freedom.
Continue with it and it will get you to financial independence.
Now, let's talk about how to get you there.
0. Stop All Retirement Investing (Until Step 4)2. Starter Emergency Fund of $10003. Eliminate Debts Smallest To Largest (a.k.a The Debt Snowball)4. Full Emergency Fund of 3-6+ Months’ Expenses5. Invest A Minimum of 15% Income Into Retirement Accounts (and increase savings rate to 50%+ if possible)6. College Funding (if applicable)7. Pay Off The Home Mortgage8. Build Wealth, Serve, Be Ridiculously Generous And Go FI (Financial Independence)!