In this blog series I show you how to use budgets in a non-restrictive order, you become the boss of your money. The tool I used to create my budget is called YNAB, short for You Need A Budget. This post is about your embracing your true expenses.
Embracing Your True Expenses
For most people, a lot of expenses are the same every month. For example your rent payment, utilities, even groceries will be about the same amount every month. Also, every month your salary is paid, so it’s easy to budget for these fixed expenses from your regular income.
Some expenses are not that regular. Examples of irregular expenses are the holiday season gifts (once per year) or insurance payments that you pay once or twice per year. These are the easiest of the non-monthly expenses to budget for. You know how much they’ll be and when they are due.
The harder to budget for costs are things like maintenance to your car. You know it’s going to happen, but you don’t know exactly when and how much it will be.
YNAB helps you with this. They call it their Rule 2: Embrace Your True Expenses.
Budgeting In YNAB
By using YNAB, it’ll be easier to budget for these larger, irregular, or unexpected costs. For example, I save for the yearly city and real estate taxes every month, by putting money in my City & Real Estate Tax category. Every year I get the bill, and pay it from that category. When the bill comes there’s enough money to pay it, and I don’t need to give up other things that month. I embraced my true expenses, by budgeting about 100 euros every month to pay a yearly 1200 euro bill.
It’s easy to do this in YNAB. Just create a category for yourself, in my case with the name City & Real Estate Taxes, and then put money in that category every month. Just divide your yearly bill by 12 months to see what you should set aside monthly. I make sure I’m on the safe side, so when for example my monthly amounts comes down to 93 euros I budget 100. I won’t miss the 7 euros every month, but it gives me a bit of a buffer I case I miscalculated the yearly amount and it’s higher than expected.
The same goes for all your other expenses. If you want to spend 600 euros per year on Christmas gifts, just start budgeting in January and put aside 50 euros per month. By December, you will have your 600 euros ready. You gave your euros a job, like per Rule 1, and you embraced your true expenses, as per Rule 2!
Unknown Future Expenses
It’s harder if you don’t know up-front how large the expenses will be, or when they will come. An example is maintenance and repairs for your car. Currently, I drive a company car, so I don’t have to deal with these costs anymore, but a couple of years ago when I owned my vehicle I budgeted for fuel, taxes, insurance, but also for maintenance and depreciation. I think I budgeted 100 euros per month for maintenance, so I had 1200 euros per year. In the end I never needed that, but better be safe than sorry.
What if there’s a garage bill coming up a month from now? Then it’s not enough to just budget your monthly amount (given you just start budgeting now). Maybe you do spend 1200 per year on maintenance, but if you start setting aside 100 euros per month and in the second month you get a 600 euro bill you don’t have the money ready.
You can solve this by front-loading your maintenance category by a couple of hundred euros, so that you know that even if unexpected costs happen, you can pay for them. Also, just keep filling up that category with 100 euros per month. As soon as you’ve gotten to a point where you can predict more reliably when costs are going to happen, you can take some money from that category and from there on just budget monthly.
In the end, budgeting is about flexibility and thinking strategically ahead, not just allocating money you want to spend this month. By taking into consideration larger, less frequent expenses you will always have enough cash to pay for things that happen.
That should give you peace of mind, and a clearer picture of your finances. Instead of just looking at your bank account and assuming you have enough money to buy those shoes (your balance is sufficient) you now know that you need part of that money in the future so no, you cannot buy those shoes today (but you can budget for them and buy them next month!).