When doing a regular monthly, weekly or fortnightly budget it can be difficult to remember expenses that come in quarterly or annual cycles, and because of this there have been times when I’ve done my monthly budget and completely forgotten about an annual expense.
Irregular expenses are costs that change either by time, or by amount regularly. They are somewhat difficult to forecast because of their constant change, and can lead to overspending in certain budget areas and a negative cash flow for the budgeted period.
Examples Of Irregular Expenses
Common examples of irregular expenses in respect to time are:
- Medical visits
- Dental visits
- Car maintenance
- Outings – restaurants, venues, holidays
- Birthdays/Anniversaries – gifts, presents
Common examples of irregular expenses in respect to amount are:
- Transport costs – fuel, tolls
- Insurance renewals
From the above examples, you could probably identify with a few expenses that you might have which are irregular.
How Do You Budget For Irregular Expenses?
There are a couple of approaches I have used to help minimise the impact of irregular expenses.
Firstly, it helps if you are aware of them. If you don’t know an irregular expense is coming, then you’ll be overspending on your budget and tapping into your savings. That’s ok, that’s what an emergency fund is for, but the better aware you are of a pending irregular expense, the better you can manage your finances around it.
If an irregular expense is frequent, such as transport costs and groceries, you could apply an average with an adjustment to accommodate the fluctuations that will occur over the course of your budget period.
For example, as I have been budgeting monthly I would calculate the average grocery bill per week and then multiply the average grocery bill by the number of Tuesdays in the forecasted month. The same applies for fuel and tolls.
For annual expenses that are irregular, such as insurance, you might not know what the premium will be over the course of the next 12 months until you get the quote a month before the due date.
If you have the funds to be able to afford this annual expense then it would be a matter of planning for it and then making an approximate judgement on what you think the bill will be for the new year, otherwise if you need to save for the money then allocate an amount each budget cycle to be put aside for that expense.
For example, I currently have house insurance, and paid for this one annually. If I didn’t have the annual amount to pay in my bank account, then I would have calculated an approximate charge for the bill next year and divided this amount by 12 to get a monthly provision of what I need to put aside each month to afford for this cost when it comes around next year.
The only issue I’ve had with provisioning for expenses is that unless they are put into a different bank account that I don’t regularly watch, it can be tempting to spend the money and think to yourself that you’ll save it back up when the bill comes around.
If you’re like me, you’ll want to put in some strategies to prevent yourself from overspending. The best that worked for me was by setting up an automatic transfer to another bank account (at a different bank) to help provision for this cost.
Another thing I also did, especially for our car insurance, was to convert the annual insurance premium into a monthly one. You will end up paying more than an annual premium, but if you find it difficult to save up for the annual cost of an irregular expense, see if you can convert it to a regular expense. In my case, with our car insurance, I was able to change it so that I was charged a monthly premium.
Why Irregular Expenses Are A Problem
As you can see from how to budget for irregular expenses they are a problem because they can be difficult to forecast precisely, and because you need the discipline to be able to provision for these expenses each month.
Another reason for why these cause problems, especially when it comes to medical, dental or car maintenance expenses, is that these types of expenses tend to happen unexpectedly.
You could have the perfect budget forecast, but then find yourself in complete agony and pain over a toothache, or perhaps your child needs to be rushed to hospital and requires minor surgery!
And for some strange reason irregular expenses tend to compound when you least expect them too, but this is why the best antidote to these types of irregular expenses is to build up an emergency fund.
The purpose of an emergency fund is to help provide a buffer for times when these sorts of irregular expenses occur. They help you by preventing you going into debt, and causing further cash flow issues in the future.
To better handle irregular expenses here are some tips:
1. Be aware of them and their nature. This would involve monitoring your account on a regular basis, making any necessary adjustments to better plan for the future. Use averaging if needed for those irregular expenses that happen frequently, such as groceries or fuel.
2. Provision for annual irregular expenses such as car maintenance, medical (etc) – get a second bank account if needed and automatically transfer funds to this account each budget cycle to keep it out of mind. Then bring it back in when you’re ready to pay for your bill. Or, if this is too hard, see if you can change an irregular expense to a regular one by seeing if the bill can be paid monthly.
3. Build up an emergency fund to better prepare you for the impact of any irregular expenses outside what you had forecast.
An irregular expense is a cost that doesn’t happen on a regular basis – it varies either by time or by amount. They can be difficult to forecast, but things you can do to minimise their impact on your budget is by being aware of when they occur (such as your annual insurance premiums, when birthdays and anniversaries come up – especially big round ones), and by having an emergency fund such that when those operative expenses like medical, dental or car servicing costs come around you have savings to help cover it.