Have you ever made a budget that looks good on paper but never seems to work out in reality? If so, you might be forgetting to budget for periodic expenses.
Without careful planning, it’s easy to let periodic expenses ruin your budget. Because they occur infrequently, irregular expenses can catch us off guard. The good news is that this common budgeting problem is easy to fix.
In fact, planning for periodic expenses may be the key to mastering your budget once and for all.
Seriously! Learning to budget for periodic expenses is at the heart of budgeting success.
What Are Periodic Expenses?
Unlike fixed and variable expenses that come up every month, periodic expenses are costs that come up less often than monthly. They might be due annually or a few times a year. Or they might not even come at a regular interval at all.
Some come in predictable amounts, like your semi-annual property taxes, while others have variable costs.
Whether they are fixed or variable, planning ahead for periodic expenses will dramatically increase your budgeting success.
Let’s Look at Some Examples
To effectively tackle periodic expenses in your budget, you need to identify as many as you can before they become due. Here are some examples of fixed, regular costs to get your wheels turning. These come up less frequently than every month and are of a predictable amount.
- Life Insurance Premiums
- Car Registration
- Magazine Subscriptions
- Annual Subscriptions (e.g. delivery services or software subscriptions)
- Car Insurance
- Property Taxes
- Club Dues or Association Fees
- Domain Registration Renewals
This isn’t a complete list, so be sure to brainstorm all of your expenses that you don’t pay every month.
It’s also important to consider your variable periodic expenses. These are expenses that you know you’ll face at some point, but don’t come with a fixed cost. Here a few examples to get you started:
- Car Maintenance
- Medical Expenses
- Home Maintenance
You may not be able to predict the next time you will have to repair a car, but if you own one, you can be sure that at some point you will have to pay for some maintenance.
Christmas, on the other hand, shows up at the same time every year. Christmas costs are concentrated into one or two months out of the year, and when they come up, they are usually significant. But they don’t have to ruin your budget every November and December.
We’ll talk about how you can easily plan for all of these costs soon, but first, I want to show you why periodic expenses can be such a challenge.
Why Your Budget Keeps Failing
Periodic expenses are notorious for wrecking budgets!
When you create a budget, you naturally start with your income and expenses. After listing out your monthly income, you move on to your monthly payments. Adding up your monthly payments is pretty straightforward. It’s hard to forget the bills you’re continually paying!
Next, you take your total monthly income and subtract out your monthly expenses. So far, so good. You have money left over, and you seem to be living within your means.
As the month plays out, you realize that your Amazon Prime membership is up for renewal. Oops! Forgot about that one. Then your mechanic tells you that not only does your car need new brakes, it also needs a timing belt, and you may as well replace the water pump while he’s working on that. That month, your budget goes bust.
But that’s one month. It was a fluke, right? Next month will be better. Sadly, when next month rolls around, your property taxes are due, and your son needs an expensive prescription. Neither of those costs was in your list of monthly expenses. Once again, your budget is blown.
Related: Why Venmo Is Disrupting Your Budget
Here’s the problem: Looking at your list of monthly financial obligations is deceiving because there are many significant, less frequent expenses that don’t fit on that list.
Hello periodic expenses!
These tricky costs seem to show up out of the blue when we’re not prepared for them.
If you have a lot of cushion in your budget, then you may have the flexibility to cover the cost of these surprise expenses. But if you’re like many people, you don’t have that kind of flexibility. Your budget has failed once again.
Budgeting for periodic expenses is the key to budgeting success.
How to Budget for Periodic Expenses
Realizing that periodic expenses are real expenses, not a series of flukes that keep thwarting your budget, allows you to budget for them successfully.
The best way to budget for these big expenses is to spread their cost out over time.
Here’s how to set yourself up for success.
- Take a look at what you spent last year on periodic expenses. Go through the examples above to give you a good place to start. Write down all the types of periodic expenses that apply to you and add any others that you are likely to face as well. Add each periodic expense as a category in your budget.
- Add up what you spent last year in each of those categories. These numbers might shock you. After all, they’re big enough to bust your budget month after month. Think of how nice it will be to have saved up for these expenses ahead of time!
- Divide the annual amount for each periodic expense category by 12. For example, if last year you spent $1,500 on holiday expenses, you’ll need to set aside $125 each month this year. Add that amount as a monthly line in your budget.
- Set aside that money each month and don’t touch it. Whether you’re budgeting with cash envelopes or using a spreadsheet or an app, be sure that the funds for each periodic expense category are kept safe from accidental spending.
How awesome will it feel when these periodic expenses pop up throughout the next year, and you are already prepared with the money on hand?
No More Dreading Large Expected Annual Expenses
Before we started to budget like this, I remember dreading November’s budget. Not only is it typically a more expensive month because of the holidays, but that’s also when our annual life insurance premiums are due. Since we didn’t save up for either of these significant expenses, they had to come from our regular monthly spending categories, which meant everything was tight that month.
Our family spends $810 each year on life insurance. Divided over 12 months, that’s $67. If we set aside $67 each month, we’ll have $810 in November to pay our life insurance premiums. It’s much less daunting to save $67 a month than to come up with the entire sum in one month’s budget.
We do the same with the money we spend in the holiday season. By taking the amount that you usually pay for Christmas and dividing it out over the year, we aren’t financially strained during the most wonderful time of the year.
Even if you face a periodic expense and don’t have the full amount saved, you’ll be so much better off with something saved than if you had set aside nothing at all!
Benefits of Budgeting Periodic Expenses
Budgeting for periodic expenses takes some thought, but it comes with lots of valuable benefits! Here are a few of my favorites:
Imagine getting a car repair estimate and already having the money available without having to even touch your emergency fund! You know that car maintenance costs are part of owning a car, so you prepared for this periodic expense.
Spread costs out over time
No one likes a significant, “surprise” expense showing up. Spreading high costs over time makes it so they don’t drastically affect your monthly bottom line.
Know true expenses
Focusing on the obvious monthly expenses doesn’t give you a good picture of your real financial situation. Trying to work with a budget that doesn’t take periodic expenses into account is frustrating! It can easily make you think that you’re living within your means, thwarted by constant bad luck when in reality, you’re making decisions on wrong information.
An accurate picture of your true expenses lets you make decisions informed by your financial reality. A budget based on reality is a budget that suddenly starts working!
You Can Do This
Don’t let significant expenses catch you off guard again! Plan these real expenses into your regular monthly budget, and sticking to a budget will become easy.
Getting a big medical bill or paying your life insurance premium will probably never be fun. Still, I promise it’s much more pleasant when you have the money already set aside because you had the foresight to budget for periodic expenses.