If your budget is tight and has always been that way, it might be hard to imagine thinking ahead about expenses before they arise. You’re still drowning in what happened yesterday (or last month or last year). Having the foresight to plan for known upcoming expenses, or the possibility of upcoming expenses is one of the keys to getting out of the paycheck-to-paycheck cycle.
Hopefully, as you live within your budget by only spending money you actually have and continue minimizing your bills and other expenses, you will begin to find more flexibility in your budget. As this happens, you will be able to plan ahead for future expenses so they don’t set you back to square one (or worse).
Planning for Known Expenses
On Day 6, your assignment was to write down budget categories for every type of thing you’re likely to spend money on. We tried to brainstorm all the periodic expenses that we often forget until the bill arrives each year. We want to think ahead about these expenses and start setting money aside for them so they don’t catch us by surprise. The easiest way to do this is to divide the amount of what the total bill will be by the number of months you have to save for it.
You don’t need to move the money into a separate account unless you really want to. It will be safe in your checking account as long as you are spending according to your categories and recording all you spending.
Example: Every September you pay $600 for your life insurance premiums. Assuming it’s January but it’s too late to squeeze it into the budget in January, you will have 8 months to save for this annual expense (Feb-Sept). Divide that $600 bill by 8 months, and you’ll get $75. Each month budget $75 into the category for life insurance. The following year, you will have an entire 12 months to save up for your annual premiums, so you will only need to budget $50 each month toward life insurance.
For some of our periodic expenses, we won’t know exactly how much they will be. For example, property taxes change from year to year. Usually looking at the previous year’s expenses will give you a good idea of what to plan for. Since costs generally go up, it’s a good idea to over-estimate what the expenses will be. Having money leftover will be nicer than not having saved enough.
Planning for Expected Expenses
In addition to annual and other periodic bills, we will probably have some expected expenses to save for, even though we may not be sure when they will come or how much they will cost. Maybe you know that in the next couple years your home will need a new roof. Perhaps your dentist has told you that your oldest daughter will need braces sometime in the next few years.
If you drive an older car, you might want to start setting money aside for your next vehicle. Since you don’t know when your car will die or when it will no longer be worth paying for repairs, you don’t know exactly how long you have to save. Choose an amount to set aside each month in your car fund. Even if you don’t have quite enough set aside by the time you need it and you have to dip into your emergency fund, having some money saved can prevent financial hardship and borrowing.
Planning for Unknown Expenses
Unknown expenses can be an unprepared budget’s worst nightmare. When a new car suddenly needs expensive repairs or an illness requires costly medical procedures, we want our budget to be ready. I love having my budget be prepared enough so we don’t have to touch our emergency fund to cover the expense.
Preparing for unknown expenses requires some guesswork. You won’t know how much future car repairs will cost or when they’ll be needed. Looking at years past, you can estimate how much you generally spend on car repairs in a year, with the understanding that each year can vary greatly from the year before. Divide your average annual expense by twelve to get an idea of how much you should be setting aside each month for car repairs. Just like expected expenses, having something to put toward these “emergency” expenses really will make a big difference, even if you don’t have the full amount or have to dip into your emergency fund. As the years go on, you will learn from experience what a good amount is to save for these sort of expenses.
We followed the above method for many years, long before we started our YNAB budget. We used to have many different Capital One 360 savings accounts set up (you can set up as many accounts as you want) for each of our sinking funds categories. I thought having all the separate accounts was great until I experienced YNAB and could have the benefit of separate categories without having to move money between accounts all the time. I love that with YNAB I can keep all my money in the same account and not have to worry about it disappearing.
During the three years we were laser-focused on paying off $144,000 of student loan debt, we didn’t use sinking funds at all. Since we had cut our living expenses so drastically, we always had at least $2,000 at the end of the month to put toward debt payoff, even though our income-based minimum payment was actually $0. That gave us a lot of wiggle room. Instead of putting a chunk toward life insurance premiums each month, we put every cent we hadn’t spent at the end of the month toward debt. On months where periodic or unexpected expenses came up, we paid them from that month’s budget and just paid less in debt. That let us get every possible dollar into our debt payoff as quickly as possible.
I’m a little hesitant to even mention this, because it won’t work for many people. It only worked for us because we had no required minimum debt payment and we consistently had enough income above our living expenses to cash flow anything but a catastrophic expense during the month. If we had actually had a really large unexpected expenses, we would have dipped into the emergency fund.
That worked, but it was a little uncomfortable. After we paid off the last of the student loans, we started using sinking funds again, and it’s quite nice to have the money waiting for us where and when we want it when an expense comes up.
Day 21 Challenge
In your workbook, look ahead to future expenses, known, unknown, or expected. Decide how much you will allocate to those budget categories. Refer back to the list of periodic expenses that you made on Day 6 to help you.
- How have you dealt with know, expected and unknown expenses in the past?