Creating a budget that works for you and your family is a daunting task at best. It can take months or even years to work out all the kinks within a budget to get it to work properly and usually when you think you have it figured out, something comes along to mess it all up. One of those things that often sneaks up on even the most detailed budgeter is annual expenses.
How to Budget Annual Spending
Annual expenses include annual club membership fees, annual credit card fees, automobile registration dues, taxes owed to the federal or state government, and a slew of other things. When one of these annual expenses creeps up on you it can throw your entire budget off and give you a big case of the “oh no’s” if it puts you over the edge into deficit spending.
The lesson that takes many people a while to learn is that these annual expenses need to be accounted for in your budget in some way, shape, or form. Budgeting annual expenses will ensure you don’t fall victim to one of these “sneak attacks.” Currently, there are three schools of thought when it comes to budgeting for annual expenses.
School of Thought #1: Saving Large Chunks
The first school of thought is the “saving large chunks” school. Basically, whenever you come into extra cash during the month or a small financial windfall appears out of nowhere; you squirrel away this money into a safe place and wait for those annual expenses to come around. The plus side to this way of budgeting annual expenses is that it doesn’t affect your monthly budget at all.
The major negative is that you are counting on the fact that you will come across extra money enough during the year to equal the amount you need for your annual expenses. If you find yourself aligning with this school of thought you might find it very hard to have enough money for all your annual expenses. Out of the three schools of thought, this is the least likely to succeed.
If you think about it, just sitting around and hoping for extra money to show up or for that tree in the back yard to start growing money is just as likely to happen as this first school of thought. Word to the wise: don’t utilize this school of thought; it might be why your budget isn’t working in the first place!
School of Thought #2: One Month Inject
This school of thought has a weird title but it is the simplest way to budget for annual expenses. All it is is that you adjust the budget for the month when the annual expense occurs to accommodate that expense. If your club membership dues are scheduled to be paid in October, then you adjust the budget for October to accommodate this new expense.
Doing this will require you to keep a running list of what months your annual expenses occur in and it will require you to have a flexible enough budget to accommodate a decrease in one category to pay for the new expense. Of course, this means that you will have to take money away from somewhere else in your budget in order to cover this annual expense.
Much like the first school of thought, you should attempt to stray away from this one at all costs, unless of course, you have a flexible budget that can handle big changes in certain months. This school of thought is much safer than that of the first, but it still falls short of the third and final school of thought.
School of Thought #3: Divisional Budgeting
The most effective way to budget for annual expenses is to use divisional budgeting techniques. Simply put, you divide the amount of the annual expense by 12 (for the number of months in the year) and the number you get will be how much you need to budget each month for the annual expense. As an example, if you have an annual expense that costs $60 then you will budget $5 per month for that expense.
To ensure you don’t spend this money, put it into another account that makes it cumbersome to get the money out of. For example, open an account at a bank that is in a different town or one that doesn’t offer online banking (yes there are some out there that still exist). If you have self-control then go ahead and just put the money into your savings account and then just take it out when you need it.
This way of budgeting for annual expenses will put the less amount of stress on you when it comes time to pay for it. You will find that spreading the amount you need across the year will greatly increase your ability to pay for your annual expenses and will put the smallest amount of strain on your monthly budget.
This means you will also have to possess enough will-power not to touch this building stockpile of money throughout the year because then you will have to fall back on one of the previous two schools of thought to cover your butt when the expense comes around during the year.
While it sounds like the task could be daunting, there’s a method of budgeting called the Envelope Budget which makes divisional budgeting an absolute breeze, even for the most budget-challenged person.
Not only is this way of budgeting annual expenses the easiest to pull off, but it is also the safest and therefore most likely to succeed in all three techniques mentioned here.