One-time expenses can wreck your monthly budget. In this guide, we walk through how you can prepare for those surprise expenditures with peace of mind.
Even if you’re a budgeting machine who has it all together, you may still get surprised once in awhile. Usually, you’ll be caught off guard by one-off expenses. These are items that you should technically expect, but they tend to sneak up on many of us. After all, it can be hard to remember expenses that only pop up once a year, or even less.
So how do you work these costs into your budget, and what’s the best way to deal with them? Here are five steps to help you list and plan for these one-off expenses:
1. Go back through your spending and find them
First, you need to actually identify these less-memorable items. The easiest way to do so is to go back through last year’s budget.
Why use a calendar year? Because some of these expenses are tied to a certain month or season. For instance, you may pay for an HVAC tune-up every spring, or the license and registration fees on your vehicle are due each October.
Looking through all those bank records will take time, but this is the most accurate way to find your one-off expenses. Look for things like dental cleaning fees, annual checkups for your pets, HOA and other association dues, car insurance premiums, vehicle registrations, and seasonal home maintenance.
Once you’ve written down each of last year’s items, do some digging to see if payments will remain the same or even rise for the coming year. Then, make a list of all the one-off expenses, how much they’ll cost, and when you expect to pay them.
2. Brainstorm additional costs you might add in the future
Don’t stop at simply looking through last year’s expenses, though. Think about how your circumstances may have changed recently, and then add in any potential new costs for the coming year.
For instance, maybe you just got a puppy. Do some research about how much you’ll expect to pay for that puppy’s vaccines and annual check-ups, then add those to your list. Or if you recently bought a house, there are a number of homeowners’ expenses you’ll now be responsible for, that you didn’t need to worry about as a renter. Plan for them.
Read More: 30 Items to Budget for When You Buy a Home
3. Add up the total expense, and divide it by twelve.
Once you have a list compiled — including due dates and amounts — add up the total expenses and divide by 12. This will tell you how much money you’ll need to save on a monthly basis in order to ensure you can meet your one-off expenses as they arise.
4. Save for them each month
Now, the fun part. You need to set money aside to cover these expenses. You can do this in a variety of ways.
For instance, the YNAB software allows you to work these costs into your monthly budget. If you’re great about sticking to a budget on the page, then just add this monthly amount to your budget.
If, however, you tend to spend extra money when it’s sitting in your checking account, you’ll need to take a different approach. One option is to find a bank or credit union that will let you open multiple fee-free savings accounts (they do still exist!), or use a bank that allows for simple sub-accounts (like Capital One 360 or USAA).
Each month, you’ll need to set aside extra money (1/12th of that annual sum), which will go towards your one-off expenses. Make a habit of transferring this money into your savings account at the beginning of each month, and only use it for those items that are on your list of one-off expenses.
Remember, this money is not an emergency fund. It’s set aside for specific payments you’ll encounter each year, which can generally be predicted and calculated. For unexpected expenses, you’ll need to build a separate, emergency cash stash.
Learn the Difference: How to Decide If It’s Emergency Fund-Worthy
Also note that if you have one of these big expenses due soon, you may need to scramble to front-load the account now. Say you start using this method in August, for instance, to cover $600 — a year’s worth of your one-off expenses. You plan to save $50 per month to cover all of these projected costs. Easy enough, right?
But in October, you have a $400 annual car insurance premium due. You’ll only have $150 in your dedicated savings account by this time. So, you’ll need to figure out how to cover the deficit from your budget in September or October.
Then, go right back to saving that $50 per month. If you stay at it for several months (and if you’ve done your math right!), you should have enough saved for any upcoming one-off expenses by the time they roll around.
5. Add the due dates to your budget or calendar
One-off expenses like these are some of the easiest to forget, since you encounter them so rarely. So it’s best to write the due dates into your budget or put them on your calendar.
Some types of budgeting software will let you assign a due date to occasional expenses like these. Mint, for example, will allow you to budget for an expense that occurs on a certain date each year. It will even go ahead and divide out the monthly amount you should save for that particular expense.
If your budgeting software makes it difficult to add these expenses, you can just list them in your planner. Whether your calendar is paper-based or electronic, adding these expenses will help ensure that you don’t miss them.
A note on other expenses
We’ve just talked about unavoidable expenses, such as medical or dental checkups and must-pay bills. These are expenses that need to be part of your budget on a monthly basis, even if you only encounter them once or twice a year.
But what about other costs that aren’t mandatory? Things like Christmas gifts, replacing your furniture, or new winter coats for the kids?
You can treat some of these the same as other one-off expenses. Setting money aside for Christmas throughout the year can help ensure that you have enough cash available in November and December to make that Christmas magic happen. And that it doesn’t break the bank all at once.
Keep in mind, though, that you need to fund your must-pay expenses first. If you’re in a tight situation, it’s okay to forego putting $50 in the Christmas account in order to put $50 in the one-off expenses account. You can always shift your holiday spending, but those bills have to be paid on time!
As long as you keep your priorities straight, saving for both types of expenses throughout the year is an excellent budgeting strategy.
How do you handle your annual expenses? Do you plan and budget throughout the year, or just take the hits as they come?