The following post is by MPFJ staff writer, Melissa Batai. Melissa is a freelance writer who covers topics ranging from personal finance to business to organics to food. She blogs at Mom’s Plans where she shares her family’s journey to healthier living and paying down debt.
Every month, my husband and I were coming up short financially. Each month I carefully laid out a budget, and I followed it as well as I could. I say as well as I could because each and every month, I went over budget. One month it was because I had to pay our annual Costco membership fee. Another month it was because I had to buy stamps, new checks, and pay for our license renewal.
See, I was good at budgeting for monthly, regular expenses. I was even fairly good at budgeting for expenses that came every three months like our garbage bill or every six months like our car insurance. But there were a lot of expenses that came only once a year or erratically that I didn’t account for.
When you’re living on a tight budget, those unaccounted for expenses can ruin your budget and send you into credit card debt or make you raid your emergency fund.
However, there are two ways you can handle these expenses and keep your budget and your finances on track.
How to Calculate Your Irregular Expenses
The first step toward making your budget work is to consider ALL of the irregular expenses you paid in the last year. I’m not going to lie—this is going to take some time, and it won’t necessarily be a good time, but once it’s done, you won’t have to do it again.
Simply get out your credit card bills for the last 12 months as well as your checkbook. Keep track of anything you paid for that wasn’t part of your regular budget.
Just to get you started, here are some expenses you’ll want to look for:
- Yard and garden supplies/maintenance
- Pest/termite control
- Home repairs/maintenance (remember, experts recommend you put aside 2 to 4% of your home’s value per year for this)
- Maintenance agreements
- Water softener
- Emission inspection
- License renewal/registration
- Car repairs
- Medical bills
- Prescriptions
- Dental bills
- Optical exams and glasses
- Vitamins/supplements/protein powders
- Umbrella insurance
- Donations (such as when the neighborhood kids needs to raise money for his school)
- Professional dues/licenses
- Warehouse club membership fees
- Printer ink/paper
- Online filtering
- Magazines
- Dry cleaning
- Parties
- Recital fees/outfits for kids’ activities
- Yearbooks/class rings/letter jackets
- College application fees
- SAT/ACT testing
- Pet food/toys/grooming
- Vet expenses
- Animal licenses
- Tax preparation fees
The Slush Fund
The first method is the slush fund, and like its name implies, it’s simply one big pot of money for unplanned or irregular expenses.
Who Should Use the Slush Fund Method
The slush fund is perfect for those who feel bogged down by keeping track of every single expenditure all month long. These people don’t want to have to keep track of every penny like an accountant. They just want to make sure that when the time comes to pay irregular or unplanned expenses, the money is there.
How the Slush Fund Works
After you’ve calculated all of your irregular or unplanned expenses for last year, divide that number by 12. For instance, let’s say your irregular/unplanned expenses for last year came up to $14,500. You’d divide that number by 12 to give you approximately $1,208 a month that you would need to set aside in your slush fund. Then, you just dip into the slush fund when one of the expenses comes up.
Does your child need $80 for a college application fee? It’s right there waiting in your slush fund. Do you need to pay $95 for your annual vehicle registration? Just dip into your slush fund.
If you are disciplined with your money, you may want to leave this money sitting in your checking account. However, if you’re someone who will spend the money if it’s there, you may want to open up a separate account and have the money automatically deposited straight from your paycheck to your slush fund account. Then, as you pay the expenses the slush fund is to cover, simply transfer the money to your checking account.
The Separate Accounts Method
There is another, more detailed method that you can use besides the slush fund that I call the separate accounts method. Using this method, you create a separate category for each irregular/unplanned expense or group of expenses
Who Should Use the Separate Accounts Method
This method works best for those who would like a more detailed record of their expenses and spending. It also works well for people who are on a very tight budget and have to curb their irregular/unplanned expenses as much as possible. It’s also very good for those who like the envelope system as recommended by Dave Ramsey.
How the Separate Accounts Method Works
Rather than lumping all of the irregular/unplanned expenses in one category as you do with the Slush Fund Method, you instead separate them out and put a certain amount in each account. For instance, let’s say this year you know you’ll likely need to pay $800 total for your daughter’s SAT and ACT testing as well as college applications. You’ll divide $800 by 12, and then each month, you’ll put aside approximately $66 for this expense. You’ll write this in as a regular line item on your budget.
Similarly, if you pay $300 a year for pest control, you’ll put $25 a month in your budget and ear mark it for pest control.
When one of these expenses comes up, you simply pay out of the money you’ve accumulated in that category.
Drawbacks to Each Method
There are drawbacks to each method. With the slush fund method, you may overspend in one area because you see a large chunk of money sitting in the slush fund. For instance, if you budgeted just $400 a year for clothes, but you see $3,800 sitting in the slush fund, it’s easy to rationalize that the money is there to buy more clothes.
That can’t be done as easily with the Separate Accounts Method because you can see that you only have $165 in the clothing account after putting the required $33 away per month for clothes for five months.
On the other hand, the Separate Accounts Method also has its drawbacks. Let’s go back to the daughter who is applying to colleges. She may spend $100 in March to take the SAT and ACT, and then she may need $700 in October when she’s filling out college applications. Because you’ve budgeted $800 total, if you’re starting your budget in January, by October, when she’ll need all of the money, you’ll only have $660 saved, so you’ll be short in this category. You’ll then have to take the remainder of the money you need out of your regular budget or out of another category, neither of which is a necessarily good option.
The Slush Fund Method doesn’t have the same problem because you can use whatever money is in the account for any one of the expenses that you’ve accounted for whenever you need it as long as you don’t spend more than is currently in the account.
Irregular and unplanned expenses have the potential to wreak havoc with your budget. However, if you use one of these two methods, you can gain the upper hand and have better control over your finances.
How about you all? Do you use either of these methods to handle unplanned or irregular expenses? Which do you prefer?
Share your experiences by commenting below!
***Photo courtesy https://pixabay.com/en/office-tax-business-finance-620822/
