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How to Budget for Annual Expenses

How to Budget for Annual Expenses

Years go by so fast.  If you don’t plan ahead for annual expenses you’re bound to have to dip into your savings or take money out of a credit card to cover these once a year or other big budget expenses.

To actually plan ahead and budget for these types of expenses, there are basically two methods that can work successfully.  In this post we’ll discuss the two ways and what type of people they work for.   But before we get there, let’s discuss what type of expenses we’re talking about.

What Annual Expenses Do You Need to Budget For?

The most common and largest expense to account for on an annual basis is your property tax bill.  Property taxes are typically due near the end of each year and in some states (like Wisconsin) can be over half as much as your annual mortgage payments.  Annual income taxes are another large expense of this type for some. If these bills come and you’re not ready for them, then it could really throw off your finances.  Other important annual items to budget for include holiday gifts, insurance premiums, seasonal expenses, home maintenance and any other one-off expenses that you can reasonably expect to happen.  Depending on where you live and what type of lifestyle you have, there could be dozens or more of these expenses.  Making a list of them so you can plan ahead is a great way to prepare for paying them.

budgeting for big expenses

Property Taxes are Often the Biggest Annual Expense

Annual Budgeting for Good Savers

The good news is that if you are a really good saver then you probably don’t have to worry about saving and budgeting for these big expenses.  In fact, the better you save and the less you spend, the more likely that you’ll have the money you need in the bank before the expense arrives.  If you’re this type of person, the type of planning you’ll need to do is just make sure that you have money available when the bills arrive.  For example, if you know a large property tax bill will be arriving in December, then don’t put all of your savings into an investment account or in an annual CD that won’t be available when you need it.  If you’re in this situation, then you are lucky.  You should pat yourself on the back.  Most people fall into the next category.

How All Others Should Budget for Annual Expenses

You fit into this category if you are not a good saver.  Most people live paycheck to paycheck and large annual expenses can sometimes come close to putting them into financial ruin.  Part of the reason that people get into this trouble is because they don’t plan ahead.  Most people get their paycheck, pay their bills for the month, and then spend what’s left over.  While they may be spending it on important things, they need to find a way to save a portion of it for the big expenses.  One way to make this automatic is to set up an escrow account.  For example, many mortgage providers insist that some borrowers set up an escrow account that covers the annual insurance and property taxes.  That way, the monthly mortgage payment includes these expenses and the borrower will be much more likely to be able to pay the annual bills.

For those expenses that don’t have an escrow, it still pays to plan ahead.  Take the list of expenses that you made and put them in a spreadsheet.  Then, divide each expense by 12 and add up the total.  This is the amount of money you need to set aside each month of the year in order to pay these expenses.  If you are just starting to save and you know some of the expenses are coming sooner than a year, then you’ll need to save even more each month.

The trick to getting this system to work is to see the monthly amount that you set aside as a mandatory expenses.  View it as similar to your utility bill and don’t doubt for a second that you can forego saving that for even one month.  In reality, this amount that you set aside is more important than most other bills, like your cable or cell phone bills.  The biggest challenge is to literally change your frame of mind and the way you think about these annual expenses.  Create your own escrow account.  If you don’t have the discipline, then have your employer automatically deduct the escrow amount from your paycheck and deposit in a separate account that you use only for these bills.  In addition, try to become a better saver by finding new ways to save money.

This is our advice on how to budget for big annual expenses.  Do you have something to add or comment on?

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