By Kevin Gibbons
When The Savvy Life prepares a Spending Plan for a client, we group expenses into several categories. One of the main discriminators is “Monthly Expenses” versus “Intermittent Expenses.” As the names imply, “Monthly Expenses” are those that occur regularly every month, like rent, buying groceries, paying for utilities and the like. “Intermittent Expenses” are those that occur once a year or irregularly, like car registration, tax payments, auto or home repairs or vacations. We have found that most clients are pretty good at predicting and managing their regular monthly expenses. They take the number of paychecks they regularly receive in the month and divvy up the income among the monthly bills.
It’s those intermittent expenses that seem to give people grief. They’ve got their monthly expenses handled, and then along comes the car registration (in California, that can be a big expense), school expenses, birthday gifts, or an unanticipated home repair. Suddenly, their budget is blown! How many times have you thought you had your monthly budget all set and then an unplanned expense comes along and torpedoes it? Have you every felt that that happens almost every month?
If it happens every month, maybe we should stop being surprised by it.
The truth of the matter is that while intermittent expenses don’t occur regularly every month, most of them are fairly predictable. Your niece’s birthday occurs the same day each year. Your car registration and school fees are due the same time each year. Even “random” expenses like car maintenance can be fairly well predicted. If you bought a set of 50,000 mile tires 3 years ago and you average 20,000 miles driving every year, you should probably plan on replacing your tires soon. Of course there are emergencies that you cannot predict, but even then, you can budget to set aside money for the unexpected to lessen the impact.
So, how do we manage these “not monthly” expenses? We convert them into “monthly” expenses! Most of us either have a formal monthly spending plan or have an idea in our heads of what our monthly bills are (rent is due on the 5th, I fill my car gas tank on the 15th and 30th, my car loan is due on the 20th…). If you’re keeping that information in your head, stop. Write it down. Save your brain power for more creative things! Once you have your regular monthly expenses written down, make a list of the other expenses you expect to incur in the next 12 months. These include yearly bills, gift purchases, vacations and events, car and home maintenance. A good way to do this is to go through last year’s bank and credit card statements and look at where you spent money over the past year and ask yourself if you expect to spend on those again.
Once you have the list of these intermittent expenses, with their due dates, look at how you can set aside the money to meet those expenses. The goal is to get these intermittent expenses on your monthly spending radar, so covering them becomes part of your monthly home finance routine. This is where you may have to be a little more creative than most of the canned apps out there. Most budgeting software will simply look at when your bill is due and break it up into equal savings clumps. So, if you have a $900 vacation planned in three months, the software will tell you to set aside $300 each month. This is a good place to start, but you may have to be more creative, realizing that you are getting a bonus from your work in 2 months that will pay for more than half that $900. The basic idea is to lay out these expenses and then determine where the money comes from to cover them in the appropriate time.
Now you have your yearly expenses included in your monthly plan! Congratulations! You’re done, right? Not quite. There are two more things to do to get yourself on a strong footing. First, consider those irregular unplanned expenses we talked about earlier. Those things like car and home repair, school trips your child forgot to mention, emergency medical bills for accidents. These can be hard to predict, but you can at least look at them and decide if you need to consider them or if it is safe to skip them. If you have a new car, it is probably more reliable than a 10-year old car with 200,000 miles on it, so your emergency car repair savings account can be smaller. (But if you are planning on keeping the car for many years, you may want to put aside a small amount regularly now to build up for that future need.) If you own your home, you probably have to replace the roof every 20-30 years. That seems like a long “intermittent” time, but this is a big-ticket item, so putting aside $1,000/year if you can will certainly lessen the pain when the time comes due.
I understand that people do not have unlimited amounts of money to cover every conceivable expense. But if you make that list and prioritize, you can see where to allocate the money you do have, and you have an idea on where to allocate any additional money you may get in the future. When you get that pay raise, bonus or gift, before you spend it all on a celebration or new toy, you can decide if it makes sense to put part of it to one of these areas you’ve identified.
The last thing to do is to get in the habit of reviewing your near and long-term spending plans with your family on a regular basis. Melissa Tosetti, the founder of The Savvy Life, wrote a great article on the importance of reviewing your tracked expenses and upcoming spending plans with your family. I strongly recommend you read it.
If you turn those irregular, intermittent expenses into part of your monthly spending plan, you can stop getting surprised and achieve control over your spending and saving. It’s all a matter of setting up good habits so you are acting instead of reacting to the financial inputs of your life.
Kevin Gibbons is the Chief Operating Officer of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past eight years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 525 individuals and families to create Spending Plans.
They also work with financial advisors and their clients doing cash flow planning as well as giving Savvy Living presentations via webinar and in-person to audiences across the U.S.
To learn more about how Kevin and Melissa work with clients, visit The Savvy Life’s Programs Page.
If you’d like to learn more about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page