When it comes to budgeting or a spending plan, I am of the belief that keeping it simple is the best approach for most folks. I like the idea of paying yourself first and then prioritizing what is left over to first cover your core living needs and then discretionary items. My recommendation is to track expenses as they happen into either a core living expense or discretionary item allowance. I don’t think it’s useful for most folks to get hung up on budgeting line-item-minutia if it’s only going to confuse and lead them to not tracking anything.
However, if you are just getting started or it’s been a while since you reviewed your cash flow details, you need to make sure you are properly setting up your allowances between your core living needs and discretionary items. To do this, you need to take a deep dive into your current spending categories to trigger your thoughts on how each expense item may go up or down in the future. This can then help you prioritize your expenses so you know if you need to make cuts to keep your cash flow in balance.
When estimating your expected expenses, take a review of where your money has been going. Whether you track your spending regularly or are new to this, you may notice there are some expenses that get overlooked. Often they are the irregular, non-monthly expenses that can hit you hard if you are not prepared for them. I find that when people are trying very hard to plan out there cash flow, it can be these surprises that ruin well intentioned plans.
Remember to consider these expenses when creating your spending plan:
- Home and car maintenance and repair costs. These can vary a lot from year to year. It’s easy to plan for oil changes and furnace filters. But how is your roof looking? What about the tires on your car?
- Big ticket items. Is there a new car, vacation, or appliance in your near future?
- Utilities. Depending on where you live, the water and trash bills might be quarterly or semi-annually.
- Vehicle registrations and real property taxes. In some locations this may be an annual bill. This is a small amount in many states, but it can be a very large bill in others.
- Real estate taxes. This may be built into your monthly mortgage payment, but it isn’t always the case.
- Insurance premiums. These are often paid annually or quarterly.
- Subscriptions and membership fees. Many renew on a non-monthly cycle and may include club fees, magazine or newspaper subscriptions, and warehouse club membership fees.
- Medical. Out of pocket costs for eye examinations, dental checkups, prescriptions and trips to the doctor.
- Education. Tuition costs, school supplies, field trip fees, school lunches, physicals for sports, and numerous other expenses can add up over the school year.
- Children. Sitters, after care programs, camps, lessons, toys, books, etc.
- Clothing. Everyone needs to buy clothes on occasion but the level is discretionary. Think about what you typically spend over a year. Do you have any special occasions this year? Perhaps a wedding or other formal event will require special financial consideration. Understand how to prioritize this item.
- Personal Care. Haircuts, styles, spa treatments, etc.
- Gifts. Holidays, weddings, birthdays, anniversaries, we have a way of sneaking up on us. It might be a good idea to start saving, and maybe even shopping, in January. Christmas can be a major expense, depending on your traditions and the size of your family.
- Special Occasions or Events. Perhaps you or someone close to you will have a special occasion coming up soon that will require more than a gift. Are you prepared for what that might be? Are you in a wedding, hosting a shower, or a parent’s anniversary party?
- Pet-related expenses. This category includes food, boarding, pet sitter/walker, health care, toys, grooming fees, bedding, and any other supplies you feel your pet needs to be happy and comfortable.
There can be more financial expenditures that are forgotten when a budget is created so take your time to think this through. For non-monthly expenses, make sure you plan out when they are due on your calendar so you can visualize how these will impact your cash flow throughout the year. For those items that are still unknown, create an estimated allowance so you are prepared rather than reacting when the actual bill comes in. This puts you in a position to set aside funds to smooth out your spending throughout the year and avoid the “feast then famine” cash flow syndrome.