I had a question from my dear friend Kim posted on Sunday’s blog, and I just wanted to take today to answer it. Kim wrote,
“Tracy!!! I love your blog. I have my notebook and I started my spreadsheet today. Where do I put things that are paid every few months?”
I am so glad you asked this Kim. To illustrate my answer I am going to use my car insurance. Matt and I pay our car insurance every six months because we get a discount for paying it in advance rather than paying it monthly. So every month I have a category for car insurance in my budget. I take my car insurance bill and divide it by 6 and every month we pay that amount into an ING savings account. When it comes due we simply transfer the money back into our checking account and pay the bill. I also use this same savings account for saving towards our car registration that is due annually. Again, I take the annual total and divide it by 12 and then every month I have budgeted in that amount.
This is such a good point because so many of us forget the fees and bills that aren’t monthly and then they come as a surprise and usually at the worst moments. My homeowner’s association dues are always due right after Christmas! If I wasn’t planning for that bill all year, it would always be a nasty surprise rather than just an expected bill that I already have the funds set aside for. For that matter, if I wasn’t planning all year for the expenses of Christmas then the bill for that would be an even nastier surprise. I think more people go into debt over Christmas than at any other time of the year. If this is you, then planning for your Christmas expenses as part of your monthly budget is absolutely critical. Trying to dig out from the financial hole you dug at Christmas is a miserable way to start each new year. Planning ahead and making Christmas a part of your budget can set you free from that cycle. Other expenses and bills that might only come annually and that you will need to plan for in your budget may include:
Taxes (especially if you are self-employed)
Car Insurance
Car Maintenance fees
Vacation
Christmas
Birthdays (especially if you have little kids because they can get expensive!)
Home Owner’s association dues
Annual Fees on Credit Cards
Magazine Renewal Fees
School Fees and Expenses
Everybody’s situation is unique, and that is why it is so important for you to think through your costs and situation. If you can begin to plan for these expenses by including them in your budget and making them a monthly expense that you pay into a savings account, then you will no longer have your finances sabotaged by these “unexpected” annual or bi-annual bills. Again, this is where INGdirect can be such a great tool for you because there are no fees at all for setting up an account, and you can open as many as you want and don’t have to keep a minimum balance. You can give each savings account a name so that you know what it is for, and earn a great interest rate on your money while you are waiting for the bill to be due. Some of you may be frustrated by the idea of having multiple savings accounts. It is definitely not a law that you have to. You can just have one savings account that you keep a ledger for yourself. In that ledger you can break all of your different categories down so that you can track your savings. However, if you are just going to have one savings account, it is very important to track your savings so that you know exactly what you have to spend on Christmas and don’t spend your money set aside for taxes (for instance). If this plan sounds better to you then go for it. The important thing is to have a savings account and to have a plan for these expenses in your budget.
I just want to add one more thing as a note of explanation today, because tomorrow we are going to deal with how to actually balance your budget – I promise! I have dealt with actual bills (please see my blog “Learning for Life”- April 30th), estimated bills (see “Highs and Lows – Changing Seasons” – May 1st), and now infrequently occurring bills. I just want to quickly address the expenses at the bottom of each section of my budget. If you didn’t get to download the budget spreadsheet from yesterday, you can get it here. At the bottom of the “Beginning of the month” section and the “Middle of the Month” section you will see expenses like Groceries, Baby (may not apply to you), Entertainment, Gifts, Clothing, and Gasoline. These are expenses which you may not easily be able to assign a cost value to.
Many of you may have no idea what you spend on groceries, or entertainment, or gasoline, or especially on gift giving. I am going to do a whole blog on this very soon, but I wanted to just say that if you don’t have any idea, you can go back and look at either your credit card or your bank statement and try to determine what you have spent in these categories in the last month. If you do use a program like Quicken or Microsoft Money, or something like them, then you can just do a report on your spending in these categories for the last couple of months and take an average from that. However you determine it, for now, it is good to just give yourself a number. You can always go back and adjust it if you didn’t budget enough for groceries or you budgeted too much for gasoline. Each month as you go forward using your budget, you will get a better idea of what you need in each category. However, if you are on a very tight budget you may need to set that budget amount and then possibly change the way you live to fit within your budget, rather than change your budget to fit the way you live. For instance, if your dream is to get to go on vacation this year, you may not be able to continue to eat out every night and be able to realize that dream. Working within your budget may mean that you limit your entertainment budget to just eating out once a week, so that you also have room in your budget to save towards your vacation. Again this is not about deprivation, but it is about being purposeful with your money.
So I will see you tomorrow with a plan for balancing your budget. Thank you again Kim for your question, and for all of you I just have it in my heart to bless you with this today,
Philippians 4:6-7