How Do I Budget for One-Time Expenses?
Tips for Staying Ahead of Those Pesky One-Time Bills
One-time expenses can be tricky to include in your budget, because most of the time, they tend to sneak up on you. You can probably recall a time when a one-time expense caused you to dip into savings. Maybe it was an unexpected increase in your insurance premium or your leaky roof needed emergency repairs.
While it might seem challenging budget for these one-time expenses, the good news is that you can by using the divide-and-conquer approach. Focus on the three basic types of one-time expenses that come up: predictable once-a-year costs, occasional costs that strike unexpectedly, and true emergencies.
Expenses that Come Each Year
To budget for annual costs, like holiday gifts and property taxes, you can set aside a small amount each month into a savings account, and accumulate funds to cover these predictable expenses.
Formulate your budget for these expenses by looking through your previous year's records to see how much money you spent on one-time charges. Add everything up, and divide this sum by 12 to figure out how much money to set aside each month. Budgeting worksheets are useful in helping you figure out how much you'll need.
Occasional, Unplanned Expenses
You can budget for occasional expenses, like your car overheating or your computer crashing, by creating special funds earmarked specifically for maintenance. Determine how much you'll need to spend for the year, and contribute a small amount every month to a special savings account earmarked for this category.
For example, create savings that are earmarked for "home repairs." A good rule of thumb is to contribute 1 percent of your home value into the fund each year. For example, if your home cost $200,000, contribute $2,000 a year, or $166 a month, into this fund.
Next, create a savings fund earmarked for "car repairs." You might choose to contribute $600 a year, or $50 a month, depending on how old your car is and how often it tends to break down.
Some people like to use cash and put it into several envelopes to keep funds for separate purposes, but you can also use online tools to do the same thing without needing to keep cash lying around the house. Online banks like SmartyPig allow you to create multiple savings accounts that you can "nickname," or earmark, for each category.
Your goal should be to have special savings accounts that are large enough to cover these occasional repair and maintenance costs. Keep in mind that if a major car repair pops up while you're in the process of building the account balance, you might need to pull funds from your home repair account to cover the costs.
A real emergency is a larger unplanned, unpredictable event like a job loss or a no-fault car accident that necessitates a lot of out-of-pocket medical costs. This is different from an "occasional expense" like a car repair, which happens often enough to be predictable.
For these types of expenditures, you can add money to an emergency fund, and consider applying for a credit card that you will only use for such emergencies. Calculate how much you need to have in your emergency fund, and do some division to figure out how much savings to budget each month so that you can get enough dollars into your emergency savings.
Everyone's situation is unique, but as a guideline, build your emergency fund large enough to cover three to six months of your total living expenses, which will help tremendously if you were to lose your job. Aim for a savings amount that covers closer to six to nine months of living costs if you’re self-employed or have irregular income. For freak occurrences, like a car accident, set aside at least two to four months of living expenses in case you cannot work.