FLM Step 20: Wide Open Wallet on planning for periodics
In honor of Financial Literacy Month, we created a microsite that offers 30 simple steps to financial wellness–one for each day of the month. To enrich the experience, we asked some amazing people to guest post during the month on a topic that is related to the day’s step. Their dedication to financial literacy is truly inspiring! Today, the Ashley from Wide Open Wallet discusses planning for periodic expenses.
Periodic Costs are those costs that tend to sneak up you. Christmas, birthdays, routine car maintenance, school clothes, ect. They aren't paid monthly so they often don't have a spot in your monthly budget. But you know they will come eventually. I know in our house getting the registrations on our cars renewed always sneaks up. To make it worse, they are both due in the same month. So that's quite an expensive surprise. But there is no excuse for it. We should have been planning for this expense all year long.
So how exactly does one plan for these periodic expenses?
1. Make a list of all your periodic expenses. Holidays, important birthdays, vacations, car expenses, home maintenance, lump sum insurance payments, ect. I did a quick tally in my head and figured I have about $3,000 a year in periodic expenses. But you will want to do more than a quick tally. It might take a few days to think of everything. These bills sneak up on you because they aren't on your mind until you get the statement in the mail. So take your time and try to think of everything.
2. Take that total and divide it by 12. This will give you the dollar figure you need to set aside each month in order to cover these expenses. So my $3,000 breaks down to $250 a month. It might seem like a lot but these are expenses you are already paying, so you should be able to afford it. If you know you get a periodic windfall, such as a bonus, that you always use to cover an expense then that's fine. Use that in your calculations. Subtract the windfall from the total and then divide the balance by 12 to get your monthly contributions. For example, let's say I knew we were getting $1,000 and we decided we were going to use that for Christmas. My calculations would be $3,000 - $1,000 = $2,000. $2,000/12 = $166.67 needed per month.
3. Set that money aside and draw from it as needed. How you set up your account for this money is up to you. I recommend a savings account that is separate from your emergency fund and linked to your checking account for easy transfers. It should be separate from your e-fund because you want to know exactly what you have available to spend. You certainly don't want to dip into money you have for emergencies to buy your niece a birthday present. And having easy access to it will make life easier when sit down to pay bills. But your system needs to work for you, so do what works.
Once you have the account up and running make the monthly deposits you calculated in step 2. If you're like me and don't like the idea of having everything lumped together you can do a couple of things. You could set up a totally separate account for the big costs. We have a totally separate account for our vacation savings. Or you could keep a record of how much is in each category in a spreadsheet, or word document, or on just plain old paper. Write the "account" on the top of the page and then each time you make an addition to the account keep a tally on your sheet. For example, let's say out of the $166 I'm setting aside monthly I know that $50 is for vacation. I want to know exactly how much I have in my vacation fund so that I don't overspend. So on the top of my page I write "VACATION FUND". Then each month I record that I deposited $50 in the account. One year later I have $600. I take my vacation and spend $550. When I come home I subtract that amount from the $600 balance. Even though the money is going into a pool along side my car registration money I can still keep track of what I have in each category.
It might take some time to get rolling, don't be discouraged. If you start saving for Christmas in November you obviously won't have enough come Christmas time. So take that into account. You might want to give the new fund a boost with a lump sum payment when you start. That way a big expense early in the program can still be funded. But if you don't have anything to jump start the system, that's ok. Just stick with it. You'll never be sorry that you put some money aside for unexpected costs.
Ashley is a 31-year-old work at home mother of two. The goal of her blog, Wide Open Wallet, is to open the lines of communication when it comes to money.