“How do I budget for large, irregular expenses?” is a question I get a lot. As part of my goal to help 1,000,000 people survive, thrive and where possible, get off Centrelink, I am working with experts to answer these questions and more. You can find all posts relating to Centrelink here. Today, Cath, the founder of Get Money Wise shares tips to budget for irregular, large expenses. Note, there is an ‘affiliate link’ if you use the code contained in the post to get the bonus money.
Budgeting for irregular and large expenses can be a tricky balancing act, especially when on a low income. Most of us, at least once, have had that one bill which snuck up on us when it arrived in our letterbox.
Something we had forgotten we need to pay each year. Like car registration, an insurance premium or our annual check-up at the dentist.
With the day to day outgoings associated with our weekly or monthly budget, these irregular large expenses can be easy to overlook.
The pay check to pay check cycle
I recall a time about ten years ago now when I first moved in with my now husband. He received his car insurance renewal and registration yet had absolutely no money in his account to pay them.
This was a fairly regular occurrence for him. As a part-time chef who got paid in cash, he was stuck in a pay check to pay check cycle.
He wanted to be better with money and not need to ask his parents for a loan when these big expenses came up. He was one of the lucky ones though, not all of us are fortunate enough to have a backup plan of someone else being able to help us out when our income falls short.
He was suffering from overwhelm about how he could possibly afford to pay these large bills on his small wage.
Around this time we had decided as a couple we wanted to get married and save for our first place. So we needed to make sure we were being wise with our money. I was only on a very low entry level wage and my now husband only worked part time as a chef so money was tight.
I had always been relatively good with my money so went to work creating us a yearly budget.
Predictable yearly costs
I knew I needed to include the weekly costs like groceries, petrol and rent or the mortgage. I needed to come up with a way to make sure I also had money set aside for the bigger periodic costs.
These are expenses you know will occur, but only happen once a year or perhaps once a quarter.
They fall into two categories – mandatory and non-mandatory.
Mandatory expenses include such things as insurance premiums, car registration, electricity and water bills.
Non-mandatory expenses are those you do not have an obligation to pay but are things you know you are likely to need money for. Christmas or birthday gifts and kids clothing are what come to mind for me in this category.
How to budget for predictable expenses
Since some of the yearly bills are less memorable ones, to ensure you don’t let one slip through the cracks go back in time one calendar year. Look at all your bank records and note down what the bill was and what month it was paid.
Put in some thought into if you think you will have any new expenses you didn’t have last year but you will incur in the next twelve months. People often overlook this and it can catch you off guard.
I treat my non-mandatory expenses like Christmas and birthday gifts as one-off expenses too, so I save a little bit each fortnight for them. Rather than being left short when the time comes.
Once you have your total yearly expenses, divide it by how often you get paid. I am paid fortnightly so I divide all of the yearly costs by 26 and ensure I put this money aside straight away on payday.
Whilst this can take a little bit of time the first time you do it, it is a total game changer for your money management so it is worth the investment of time. The following years budget becomes a lot easier as you already have a template to work off.
Where to keep your bills money
It’s a good idea to keep a separate bills bank account. I set up an automatic direct debit after pay day with the exact amount I have worked out I need automatically transferred each fortnight.
A high-interest savings account is usually a good place to keep the funds. Whilst the interest rates aren’t amazing, they are higher than your day to day transaction account.
Choose an account which allows you easy access to your funds and includes a BPAY facility to make it easier to pay your bills when they come due.
Find out what works best for your needs in terms of account set up. I have one general savings fund and track what is assigned to each category via a spreadsheet.
Other people find it best to open several savings accounts, one for bills, one for a holiday fund, one for emergencies and so on.
My best advice is to find the approach that makes the most sense to you. That way you are most likely to stick with your goals by following what comes more naturally to you.
(Note from Kylie, I use ING for this banking and split it into a couple of accounts. If you use the code CNW116 we both get a bonus, usually $50 or $100, if you sign up to ING Everyday banking, which is a great kick start to your bills account or savings.)
In addition to your bill account, it is always a good idea to establish a separate emergency fund.
This account should remain untouched except for unexpected events such as managing through a job loss or to pay for a new appliance if one breaks.
Avoid dipping into this fund to pay for your irregular large expenses.
There are different schools of thought as to how much of a buffer you should have in this account. Some suggest starting with building it to $1000. Others say you should look to have at least 3 months living costs saved up.
My approach is to contribute at least a small amount to this account each pay period. But I make sure my bills account is topped up first.
(Note from Kylie – I started with $1,000 and have lots of tips on making money quickly here. My preferred minimum recommendation is $5,000 as that is enough for bond on a house and advance rent if you suddenly have to leave your home, it would cover a decent second-hand car if needed, a few months living expenses for most people etc. Then build it to 3 or 6 months).
Adapting your plans
Even if you implement all of the information above, this won’t necessarily mean you never have an unexpected expense come up again.
We are all human, so be gentle with yourself when things crop up.
If you are armed with a bills and emergency account, you will be much better prepared than you were a year ago.
Cath is the founder of Get Money Wise. She writes about personal finance which focuses on helping others to change their money mindset and create a path to financial independence. The Resources section of her site has some great tools to help with budgeting, as well as some kids activity books to teach your children about money. Find out more at https://www.getmoneywise.com.au