Random Expenses to Budget For.
Do you have a yearly expenses account for budgeting purposes? Or do you find yourself running into “unexpected” expenses all the time, with no way to pay for them?
It’s possible to stop those random expenses from creeping up on you – all in the form of something I like to call a yearly expenses savings account.
What is a savings account?
A yearly expenses savings account is an easy way to put money away for those expenses that don’t happen every month, but rather, every other month, every few months, or every year.
You must come up with a list of expenses that happen over the course of 1 year, add up their costs, and set aside that money to use throughout the year as those expenses present themselves.
Instead of just having a pile of money set aside for these random expenses, you need to know what all of that money is for. You need to have a cost determined for each individual expenses in that yearly expenses account.
What are your yearly expenses?
Sit down and go over every single expenses that might come up in a year. Think about those irregular expenses that you have been faced with recently, and write them all down. Even if you don’t know what month those expenses will occur, or what the exact cost will be, at least write them down.
Some things you may consider including are
- Birthday gifts
- Christmas gifts, food, decor and entertainment
- Hair cuts
- Oil changes for your vehicle
- Pet vaccines, special medications, special pet food
- Automobile and Home Insurance
- Dentist Visits
Of course, your list may include other things and will likely not include all of the examples above. Think very carefully about the expenses you incur each year and add them to this list.
How much to budget for each expense
This step will come with a bit of trial and error. You will have to make an estimate for most things on your list, so to be safe, always go with the higher estimate. That way you will be more likely to stay on budget. If the cost ends up being much less than what you thought, you can lower that amount for next year.
When it comes to things like birthday gifts, you will need to make another list with the people you will likely have to purchase gifts for. Determine a budgeted amount for each person, add those numbers up, and that is your budget for birthday gifts for the year.
Do the same thing for Christmas gifts.
Some things will likely be the same price each year, such as oil changes, insurance and pet vaccines. Double check what those prices will be, and put those numbers on your yearly expenses list.
Setting up your account
I have written about yearly expenses accounts before, and a question I am often asked about them is about where you should keep your savings.
My personal recommendation is ING Direct for a few reasons.
- They offer a higher interest amount than most banks do
- You usually have to wait 24-48 business hours to get your money (this is a good thing – you don’t want the money to be too accessible, otherwise you might spend it on things other than those in your yearly expenses account)
How to start saving money
Once you have written out your yearly expenses and their costs, you must add all of those costs up to come up with a yearly total.
Divide that yearly total by 12 and that’s how much money you must be setting aside each month. To make things easier on yourself, set up an automatic withdrawal with your bank to have that monthly amount deposited into your yearly expenses account each month.
As you incur each expense, you can take the money from your yearly expenses account and put it back into your chequing account. Alternatively, you can pay for each expense directly from that yearly expenses account. The choice is yours.
It’s important to have this yearly expenses account for budgeting. Running into those random expenses always seems to happen at the worst possible time, doesn’t it? That is why a yearly expenses savings account is so important.
If you don’t want to have a separate account for this spending, that’s fine. As long as you are disciplined enough with your money that you can keep it in your chequing account and not spend it on anything except those random expenses (that you have budgeted for), this money can be saved anywhere you want.
The most important thing is to keep these annual costs in mind when creating your budget. Don’t ignore them and assume you will figure something out when those expenses pop up. Instead, have a plan in place for paying these expenses easily.