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You have an idea about your monthly expenses – food, clothing, utilities, rent or house payment, gasoline, childcare, blow money, etc. So why is it so hard to keep a workable budget? Answer – The unexpected, irregular, and unbudgeted items.
Three categories will simply wreck a budget, leaving even the most determined person overwhelmed and frustrated with the process.
Emergency items, such as: Medical copayments, Veterinarian bills, Automotive repairs, Home repairs
Solution: Emergency Fund
These are items that usually have to be taken care of immediately. Because of that, these come out of the emergency fund. They are typically unexpected but necessary to protecting our livelihood, which classifies them as emergencies. If your emergency fund gets low, replenish it as quickly as possible, even at the expense of the next two categories.
Irregular bills, such as: Automobile insurance, Automobile registration, Homeowners Association dues, Property taxes and insurance (if not escrowing), Life insurance, Seasonal utilities, Back-to-school expenses
Solution: Convert to a “Monthly” budget item.
How? Take your yearly total for each category and divide by twelve. This converts those items into a monthly amount needed to meet these needs. Save this amount each month into a separate account (not the emergency fund) and draw from that account to pay for these expenses as they arise.
Occasional expenses, such as: Gifts and special occasions, Automobile replacement, Vacations, Home improvement, New furniture/TV/boat/appliances
Solution: Extra savings
These are usually luxuries above and beyond the provision and protection of your household. You won’t die, get divorced, or lose your job if you don’t have them. These should be saved for in a separate account as well, and you should delay purchasing these items until you have the money to pay cash.
The idea is to plan. Once these are identified, it becomes much easier to allocate some money to the things that are most important to you. When you don’t have the money for these, these expenses have a tendency to land on a piece of plastic. Then you’re working the bank’s plan. Have a plan of your own and find some peace!
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