Biggest budget breakers are periodic expenses
You may have a good idea of where your money is going on a day-to-day basis, but before you start working on a spending plan or budget, it is important to call attention to the number one budget breaker: periodic expenses.
Periodic expenses are those that are not paid on a regular monthly basis. For example, both holiday and tax debts are periodic, meaning they are not part of regular monthly expenditures. In that regard, they join the ranks of other expenses such as auto registrations and vacations. Often, it is known when these events will occur, but many still fail to plan for them. Unfortunately, when these expenses arise, many people rely upon credit to extend their monthly incomes; using credit this way is one sure sign of impending financial trouble. To avoid this scenario, follow these tips when planning for periodics:
- Determine what you spent last year for periodic expenses. Assume that you will spend at least the same amount again this year.
- Don’t hide expenses! Just because you don’t list an expense doesn’t mean you won’t have to spend money on it. Don’t forget things like back-to-school expenses, auto repairs, and birthday gifts.
- Remember that some items, like auto insurance premiums or property taxes, may occur more than once a year.
When you have a realistic idea of what you will need to spend on periodic expenses during the year, divide the total amount by 12 and save that amount each month. Designating a savings account for this purpose may help to organize the process. Check with your financial institution, you may even be able to have the amount automatically transferred.
Here are a couple examples of periodic expenses that can significantly impact your monthly budget:
Annual auto registrations
Assume your annual auto registrations cost $800/year. How much should you budget each month to cover this expense (even if you don’t have to pay it monthly)? $800/12 = $67/month
If you own a home, assume your annual property tax bill comes to $1,200. This sum may be due only once a year, but you should be putting away an amount each month to pay these taxes. $1,200/12 = $100/month So, to be prepared for these annual expenses, you must put the calculated amounts into a savings account, or into an “auto registration” or “property taxes” envelope, each month. That way, you will not have to rely on credit or depleting your emergency savings when the bills come due.