How to budget unknowns?

[Leo]

This question probably have been asked before but I don't see a live thread. How should I budget rare or unexpected events and other small things? I get paid biweekly but I budget monthly so I have 2 extra pay check in a year. I have lots of non-budget expenses in the last couple years like

Dental
Urgent Care
Moving cost
Pay taxes
Gifts and Donations
Annual Membership like AAA
Learning such as Books
Business or legal fees
Etc

The 2 extra pay check should be enough to cover this expenses, and remaining will go to savings. Am I doing it right? How do you budget this kind of expenses?

[disneysteve]

I think you're mixing 2 different things. One is predictable bills, like annual memberships, and the other is unexpected bills like urgent care copays.

For the known bills - membership fees, registrations, insurance premiums, tax payments - they should be part of your monthly budget with 1/12 of the annual amount being set aside each month.

For the unexpected but predictable, some of that might also be in your budget if you have line items for things like medical/dental bills, car repairs, business expenses (which is a whole separate budget from your personal one). Truly unexpected things will probably come from your emergency fund.

[richard johnson]

Build an emergency fund to deal with the unexpected events. Once the emergency fund is in place, it will allow you to relax. It will give you a sense of peace, a sense of destiny with your money. It's a huge emotional step in your financial process.

[corn18]

I think you're mixing 2 different things. One is predictable bills, like annual memberships, and the other is unexpected bills like urgent care copays.

For the known bills - membership fees, registrations, insurance premiums, tax payments - they should be part of your monthly budget with 1/12 of the annual amount being set aside each month.

For the unexpected but predictable, some of that might also be in your budget if you have line items for things like medical/dental bills, car repairs, business expenses (which is a whole separate budget from your personal one). Truly unexpected things will probably come from your emergency fund.

Agree with DS.

I have my monthly budget of known expenses: gas, food, mortgage, etc... This stays fairly constant and is very stable.

Then I have my annual stuff that I know I will be paying but is not a monthly expense. I have a general idea when it is due or will be spent, but it can vary year over year:

Car repair, vet bills, kid camps, AAA dues, car registration, HOA dues, vacation, prom, b-day presents, lawn service, mother's day, Xmas and a couple of others. I do what DS states and put 1/12 of that away each month to cover all of them. At the beginning of the year, this account gets quite large building up to the vacation expense and then gets drained and then goes back up. I also get paid every two weeks and budget monthly but I use the extra 2 paychecks to feed this fund. That keeps the 1/12 monthly payments at a reasonable amount. I like keeping all of this outside the "monthly" budget so I can forecast better. Some of these are pretty big and would cause disturbing spikes in the monthly outlay. Easier for me to do the 1/12 thing.

I also adopted the method of having enough money in the budget account to cover that month's expenses at the beginning of the month. That means on 1 June, I have enough in my checking account to cover all of June's expenses. As I get my paychecks in June, that money is actually for July's expenses. That means I have a built in one month cushion.

EF covers anything I didn't think of. But 99% of the time I should have known about it, so it goes into the plan for next year.

I like doing it this way because I can tell if I am winning or losing. I always know what the monthly cash flow looks like and what the end of the year looks like.

Tom

[MonkeyMama]

We do the 1/12 monthly thing, for absolutely everything that is not a regular monthly expense. I think the extra 2 paycheck thing is fine if it works for you. As long as it is accounted for somehow.

I personally think pretty much everything is predictable and we save for 1/12 monthly for just about everything. I might now know exactly how much I am going to spend on what this year but I know if I save x dollars monthly we will have enough cash for it all. Very large and random expenses come from our more long-term savings instead.

[disneysteve]

I personally think pretty much everything is predictable

I totally agree. I often hear people say they ran into trouble because they had an "unexpected" emergency - their car needed tires or their kid got a cavity or something like that. Those things aren't unexpected. You know your car tires have a limited lifespan. You know there are going to be medical bills. You know home appliances will need to be repaired. You may not know exactly when but you know it is going to happen. You should prepare for those things.

Even a job loss isn't always a complete surprise. You may know that the company is doing poorly. You may know that there have already been 2 rounds of layoffs. When you start seeing signs, you should start preparing, trimming expenses, stockpiling cash, so that you're ready if it happens to you. Even a death in the family isn't unexpected. If you live in California and your elderly parents like in Pennsylvania, you know that one of these days, you're going to need to make the trip. You don't know when but you know it will occur and approximately what it will cost you.

There are very few things that are actually true emergencies.

[MonkeyMama]

I'd generally consider unemployment, death, and medical more of an emergency and one-off type expenses. But it does drive me nuts when annual memberships and regular car maintenance are considered "emergencies". I was more thinking to expenses that you are going to have every single year.

I agree with you too Steve though. You can certainly plan ahead for bigger and more catastrophic type emergencies. Just not what I meant in the context of this thread.

[creditcardfree]

If you know the amount, I agree with the 1/12 set aside per month.

I would build up a slush fund, a fund that you can dip into during the months when an urgent care visit comes up. I would add to this account each month either with a planned amount or when you find some extra cash come your way. This could be $250 to $2000 depending on what you feel would be appropriate for you.

I would also suggest an emergency fund if you don't already have one.

[Leo]

Thank you guys for the reply and I do agree that some of the expenses are predictable like membership and I should divide it by 12 and start including them in my monthly budget. I already have car maintenance in my budget. I calculated how much I spent on the rest of expenses I called "unknowns" for the last year data and it turns out about 1,000 dollars so I decided to put a line in my monthly budget called "unknowns" and allocate around $83.33 and for really emergency stuff like medical copay, I would have to get it from my EF.

[creditcardfree]

Thank you guys for the reply and I do agree that some of the expenses are predictable like membership and I should divide it by 12 and start including them in my monthly budget. I already have car maintenance in my budget. I calculated how much I spent on the rest of expenses I called "unknowns" for the last year data and it turns out about 1,000 dollars so I decided to put a line in my monthly budget called "unknowns" and allocate around $83.33 and for really emergency stuff like medical copay, I would have to get it from my EF.

Great plan! You should review this amount at least once a year.

[disneysteve]

Thank you guys for the reply and I do agree that some of the expenses are predictable like membership and I should divide it by 12 and start including them in my monthly budget. I already have car maintenance in my budget. I calculated how much I spent on the rest of expenses I called "unknowns" for the last year data and it turns out about 1,000 dollars so I decided to put a line in my monthly budget called "unknowns" and allocate around $83.33 and for really emergency stuff like medical copay, I would have to get it from my EF.

Great plan! You should review this amount at least once a year.

That's the way to do it, Leo. And ccf is right. Definitely revisit those numbers periodically to make sure the amounts you are budgeting are realistic based on actual expenditures.