Fortunately, big one-time expenses don’t usually sneak up on you in the same way. You probably already know, for example, that Christmas comes every December and that your 15-year-old Volvo will eventually need replacing.
Budgeting for day-to-day expenses requires tracking those expenses. But how do you budget for those less frequent outlays?
Three steps to budgeting for big one-time expenses
The goal is to treat one-time expenses as you would recurring bills. “You get an electricity bill once a month, which you pay, and it shouldn’t be a big deal because you’re mentally prepared for it,” says Jason Hull, a financial planner with Hull Financial Planning in Fort Worth, Tex. “Bigger infrequent expenses need the same approach.”
The method is simple if not glamorous: Set up a precise and realistic savings plan and stick to it. This goes against the popular “buy first and pay later” mentality, but you will reap the benefits.
“Not having to go into debt and knowing that you’ve worked hard to save for something is very rewarding,” says Colin Chase, a financial planner with Mindful Money Financial Counsel in Chicago.
Step 1. Determine the big budget items for which you’d like to save. These may include a vacation, a home, a car, gifts, furniture, or appliances. Then, research the costs involved. (If you are saving for a home, allotting 20 percent of the cost of the home’s value is a good goal, Chase says.)
Step 2. Figure out how many months you have to save for the expense. For example, if you’d love a Hawaiian vacation in February and it’s July, you have approximately six months to make your goal. Divide the cost by the number of months and you’ve got your targeted monthly savings.
If you’re unsure how to fit an expense, such as Christmas gifts or a graduation party, into your household budget, check your records to see what you paid previously for similar events. Use that number as a starting point.
As with all savings plans, it’s important to be realistic. If there are a number of big expenses on your list and your monthly savings goals get unwieldy, prioritize. Decide which items you really want or need first and which can wait a little longer. Then recalculate.
Continue to add to your emergency fund savings. Having cash for any unexpected event (such as an accident or a job loss) can really get you out of hot water. Chase recommends aiming for six months of essential expenses saved in your emergency fund.
Step 3. Start saving. If you don’t already have a savings account, open one and remember these two words: automatic transfer.
Having money automatically transferred from your checking account into your savings account makes saving easier because you don’t see what you’re missing.
If you’re saving for multiple big expenses, it’s not necessary to set up several savings accounts. Compile the total monthly savings for all of your expenses and have that amount transferred into savings. Keep a ledger using savings software, an Excel spreadsheet or—if you’re really old fashioned—several check registers to track the accumulation of funds for each of your expenses.
Tips for tackling unexpected expenses
Not all big expenses are predictable. What happens if you haven’t been budgeting and are faced with a sudden whopping expense?
In this case, a Roth IRA may be the solution. Roth IRAs are unique in that you can withdraw any money you’ve contributed at any time and not be taxed or penalized. (If you withdraw your contributions in addition to your earnings, you can be penalized if you’re under age 59 ½ and the withdrawal does not meet certain requirements.)
If you have no Roth IRA or emergency fund, you may consider hiring an hourly, fee-only financial planner for an expert recommendation. He or she could help you identify resources you haven’t considered.
“The bottom line is that you can’t spend money you don’t have,” Hull says. “If you don’t have the money, then you’ll need to reduce other expenses, take a side job, or do whatever it takes to get that money as quickly as possible.”
Ilyce Glink is the author of over a dozen books, including the bestselling 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In! Her nationally syndicated column, “Real Estate Matters,” appears in newspapers from coast-to-coast, and her Expert Real Estate Tips YouTube channel has nearly 4 million views. She is the managing editor of the Equifax Finance Blog, publisher of ThinkGlink.com, and owner of digital communications agency Think Glink Media. In addition to her WSB radio show and WGN radio contributions, she is also a frequent guest on National Public Radio. Ilyce is a frequent contributor to Yahoo and CBS News.
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