How to Make Irregular Expenses Regular

Photo courtesy of thematthewknot

A little while back, I shared my system for budgeting without actually sticking to a budget. It’s my way of staying on track with my savings goals without stressing out about how every single purchase fits into my plan.

A big part of that system is making sure that I can handle the irregular but expected expenses that pop up from time to time. Whether it’s a flat tire or a last-minute trip I’d like to make, I don’t want to have to worry about fitting those kinds of things into a “budget”, and I don’t want to stress about whether the money’s there when I need it.

I also don’t want to have to tap into my emergency fund, which is only there for real emergencies (like losing a job), not things I should be anticipating as part of everyday life.

So how do I handle those irregular expenses with minimal effort and minimal stress? By making them a regular part of my monthly plan.

Here’s how you can do it too.

Step 1: Make a top-of-your-head list of common irregular expenses

If you already track your spending, you can use those numbers to identify what kinds of irregular expenses you have on a regular basis.

But if not, don’t worry about all that yet. The most important thing is to just get started, so take just a minute or two to jot down at least a few of your most common irregular expenses.

Here are a few to consider:

Do you have a car? You’ll need money for car maintenance.

Do you own your home or are you responsible for any repairs on your rental? You’ll need money for home maintenance.

Do you ever go to the doctor? You’ll need money for your medical care.

Do you like to travel? Do you buy people gifts? Those things require money too.

This list doesn’t need to be complete. Whatever you come up with off the top of your head is great. And no matter what, I would add a “miscellaneous expenses” category to cover everything you don’t have on the list. I’ve been doing this for years and I still have a “miscellaneous” category.

Step 2: Figure out your “monthly” spending on each item

Make a quick estimate of how much you spend per year for each of the things on your list. It’s okay if you don’t know the real numbers yet. Again, the most important thing here is to get started so your best guess is more than okay right now.

Then for each expense, take that annual number and divide it by 12. That gives you an estimated monthly “budget” for each one.

As an example, let’s say that you typically travel 3 times per year and end up spending a total of around $2,000 between the three trips. That comes out to an average of $166.67 per month.

Write down that “monthly” amount for each item. You’ll use it in Step 3.

Step 3: Automate savings for each

Okay, now you’ve got your list and you have an estimated monthly amount you spend on each item. Now it’s time to start making those irregular expenses a little more regular. So how do you do it?

It’s actually pretty simple. Rather than dealing with them as they come up, you save for them ahead of time. In a dedicated savings account. Separate from where you pay the rest of your bills.

Let’s take our $166.67 “monthly” spending for travel as an example.

The first step is to set up a savings account for “travel” (I use Ally Bank to do this, but there are plenty of options). Then you set up an automatic monthly contribution of $166.67 from your checking account to that savings account and VOILA! You no longer have to worry about whether you have the money to travel. You can simply check your dedicated savings account to see how much is in there.

You can use the exact same setup for things like car maintenance, home repairs, healthcare, and anything else you KNOW will come up but can’t predict when.

And when you actually spend money in one of those categories, you simply move the amount you spent out of the dedicated savings account back into your checking account.

And like magic, you’ve made your irregular expenses regular!

But wait…

Now, I will say that this exact process works best if you do your spending on a credit card, because you can actually spend the money first and worry about transferring it back to your checking account second (before the credit card bill is due). It eliminates any problems that might arise from not actually having the money in your checking account at all times.

This is how I do it, because I use credit cards for all my spending. But you may not, and if that’s the case then I would follow the same principles with a slight twist.

Wherever you have your checking account, set up a savings account and link it back to your checking so that if you ever overdraw from your checking account, the money will automatically be pulled from your savings account.

You can call up your bank and ask them to help you set this up, and also make sure there aren’t any fees associated with doing so. I do my basic banking with Fidelity and setting up this kind of arrangement is easy and free.

Then, instead of having separate savings accounts for each irregular expense (like I do with Ally), you can just use that one savings account.

The only problem is that it becomes a little harder to keep track of how much money you’ve set aside for each bucket. One option would be to use Excel. Another option would be a program like You Need a Budget, which I’ve never personally used but have heard great things about and will track this for you. You have to pay for it though, so if you can track it on your own to start that might be the best option.

Step 4: Track your spending and make adjustments

Starting with your initial estimates is a great first step, but over the long-haul you’re probably going to want to use more accurate numbers.

The easiest way to do that is by tracking your spending, which I talk about here. You don’t need to actually keep a budget, just keep track of what you spend in different categories so that over time you can start to get at some real numbers.

This will not only help you adjust your automated savings amounts to make sure you’re not over- or under-saving, but it may help you figure out new categories you need to handle and will make you more aware of any categories where the spending is getting a little out of hand.

Step 5: Rest easy

There’s nothing more stressful than a big, unexpected expense when you don’t know where the money is going to come from. When that threat is constantly hanging over you, it makes it harder to enjoy the regular things you do every day.

The best part about this strategy is that it lets you relax. By automatically saving for things like car maintenance and travel every month, you’ve regulated your spending in those areas and ensured that you can handle the bumps in the road whenever they happen.

Good financial planning lets you rest easy today knowing that you’ve got tomorrow handled. This system is one of my keys to doing just that.