Budgeting 101: Planning for Large Expenses

Alright!  In part one we talked about tracking your expenses.  You know exactly what you’re bringing home, you know exactly what you’re spending- there might have been a few surprises along the way, but you have a framework to work from.

The next step is to write down any known, large, “lump” expenses you’ll have in the coming year, and when they’ll happen.  Examples:

  • Property tax payments
  • Income tax payments (quarterly, if applicable)
  • Medical bills for known procedures (births, surgeries, etc.)
  • Lump insurance payments (life, car, house, rental, etc.)
  • Tuition
  • Deferred payments (If you purchased something on credit and deferred payments)

You have two choices when it comes to budgeting for these expenses: lump or amortize.  Ooh, big words, but it’s easy!

If you are setting up your budget in mint.com, or on a spreadsheet, you can either plug these amounts in the month they’ll be due (lump sum) OR you can set aside small amounts every month to save up for them (amortize).  Mint will allow you to do either.  The money will still be in your bank account (or you could transfer it to an attached savings account monthly) but it will be COMPLETELY OFF LIMITS TO YOU.  Consider it spent and gone from the moment you set it aside.

One more lump sum to consider budgeting for is a new car.  My husband’s grandfather purchased a new car every 5 years, and would keep each car for 10 years.  During that 10 year life of the car, he would set aside an amount every month to purchase a new one, and part of his calculations was based on miles driven.  The IRS assumes that cars cost $0.50 per mile to drive, and that’s not far off the truth.  Driving is far more expensive than gas alone- wear and tear on the car, maintenance needed, parts, etc.  Please factor these numbers in your calculations when planning a trip, for example, before deciding that driving would be cheaper than flying.  Depending on the number of people you’re traveling with, flying (or some other transportation) might be cheaper!  Of course, if you’re able to find a good deal on a rental car for cheaper than you could drive your own AND cheaper than other transportations, AND there’s no mileage restrictions?  Have fun!  (Can you tell I dream of renting a minivan and taking off with the family?)

Consider budgeting $0.50 per mile driven in a month to pay for upcoming maintenance, and then an amount additional to that if it’s time to save up for a new car.

Whew!  OK, to recap:

  • Track your income and expenses religiously, and don’t you dare fudge or rationalize.
  • Write down all known large expenses coming up, and decide if you’ll budget for those as lump sums or set aside a small amount every month.
  • Cars aren’t cheap.

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