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Pay yourself first.
Personal finance gurus give this exact same advice all the time.
You need to be investing.
You need to be saving for emergencies.
You need to save for your kids’ college education.
You need to save for repairs to your car, your house.
And while it’s hard to argue with any of this advice… It’s also hard to follow it when the next wave of major expenses comes along to knock that money right out of your hands before it gets anywhere near a savings or investing account.
That’s why you also need to apply this same “pay yourself first” concept to your personal spending plan.
With these steps, you can start saving yourself a lot of grief from a certain category of expenses that’s most likely to wreak havoc on your bank account.
Step 1
Look at a recent month’s worth of expenses. Note them down in a spreadsheet with three simple columns: “Income or Expense,” “How Much,” and “When.”
Income would, of course, include paychecks from wages or salary. If you’re paid biweekly or twice a month, it may help to note each one individually.
Many of your expenses from that month will be what we call fixed expenses:
Rent or mortgage payments, insurance premiums billed monthly, car payments, subscriptions, auto-shipments for things like pet food, cable TV, internet and cell phone bills are among the most common examples.
Fixed expenses are typically easy to track down across one or two of your most frequently used accounts. They’re the ones that you pay every month, in the exact same amount.
It’ll help later if you use color coding, for example, to highlight all of the fixed expenses in your spreadsheet, whatever they may be.
Step 2
As you’re sifting through your payments, spending, and bills to work out the fixed expenses… you’re also going to start coming across your flexible expenses, too.
These are the expenses you rack up every month, at least once or twice — but the amount varies each time.
Think utility bills, groceries, shopping trips for other household items, and gas for the car. Debt payments like credit cards may go here, too, if you’re paying more than the minimum — but a variable amount — each month.
It’s a good idea to jot down as many of these as you can think of. So, if you’re frequently spending on restaurants and entertainment, for example, you’ll want to include those items as well.
Then, determine a ballpark amount (and frequency) for each one to include in your spending plan. At this point, you’ll probably want to look back at more than just the past month or so of spending.
Budget estimation tools from your bank’s website or in budgeting apps can make this simpler. The more data you’re working with, the more likely you are to be honest with yourself — and come up with a realistic average.
Step 3
This brings us to our final category: occasional expenses.
Also known as “periodic expenses,” these are the ones that come along, well, periodically: every couple of months, quarterly, twice a year, or even just once a year.
They may be the same amount each time. They may vary each time (sometimes wildly). And the dollar amounts can be quite large.
This makes occasional expenses the trickiest items in your budget — and the ones you’ll feel best about making a spending plan for. Here’s how.
Just like you did in Step 2 with flexible expenses, try to note as many of your occasional expenses as you can track down. Or, if it’s easier, think up what these expenses are first… then fill in the amounts.
Vacations and travel would fall into this category. So would tax bills, plus home and auto maintenance, and vehicle registration. Healthcare costs (including co-pays) and veterinarian bills, too.
It’s a good idea to account for seasonal expenses here, as well:
- Clothing and shoes. If you tend to go out and buy a whole bunch at once when the weather turns warmer (or colder), these could qualify as occasional expenses.
- Don’t forget holiday spending. We all tend to do plenty of that in November and December, as well as birthdays for family and close friends.
Whatever the exact line-up, you’ll do the same thing for every one of your occasional expenses:
- Determine (or pick) a dollar amount, then divide it into how much it would cost if you were paying it monthly instead of periodically.
- For example, tally up all of your vacation spending for the whole year, then divide by 12. Same thing for doctor co-pays, holiday spending, trips to the hair salon, etc. For other expenses that are billed quarterly, divide by four.
- Lastly, add up this “divided to monthly” amount for all the occasional expenses.
Check this against your income and your other expenses. If there’s room without creating a cash-flow problem at any point in the month, then go ahead and include this new monthly amount in the budget as well.
If that’s a bit too much for now, that’s fine. You could always use just a couple of the occasional expenses — the biggest “problem children,” let’s say — and it’ll still make a significant difference.
Either way, this money for occasional expenses should be transferred right out of your normal checking account each month. That way, you won’t find yourself forgetting to stockpile this money, spending it on random things, or getting confused.
Since you will only use the money periodically, why not earn some interest on it? This is a great use of a high-yield savings account — or a high-yield checking account. If you already have one of those, you may find it easiest to open a new one for this purpose.
And once you’ve done that… if there’s still room in your budget… then guess what:
You’ll be able to include investing and saving in your spending plan as well. Just as the experts always advise you to do.
Sources:
Pellegrini, Andrea. (2023, August 7). Identifying Expenses: Fixed, Flexible, or Occasional? Retrieved from https://blogs.illinois.edu/view/7550/1581872639
Take Charge America. Planning for Fixed, Variable and Periodic Expenses. Retrieved from https://www.takechargeamerica.org/planning-for-fixed-variable-and-periodic-expenses/
