Budgeting for regular expenses such as rent, monthly insurance premium or groceries is easy – all you have to do is set aside money for each of them every month.
But what about the cost of car service that is due every 3-5 months? Diwali gifts for your parents and close friends? That music class that your son wants to take suddenly? Or that half-yearly medical insurance you need to pay for?
These expenses belong to the category of “irregular” or “seasonal” expenses. These costs come up at different times of the year and unless accounted for in those specific months, can either deplete your savings for the month or make you borrow (credit card/loan). This additional debt can set you back many months in achieving your financial goals. To understand exactly how it can affect your savings, let’s take a look at Ravi, Riti, and Shruti's lives to see how they dealt with such expenses.
Watch How to create a budget that suits you for creative budgeting tips.
He would often forget about his and his parents’ medical insurance premium of Rs. 12,000 that had to be paid every 6 months. He would only remember when he would get an SMS reminder. Since he was on a tight budget and didn’t have additional savings, he had to borrow the money from his brother and pay it back in three monthly instalments.
How did he solve this problem?
Since the insurance premium was due at the same time every year, he set a monthly “recurring deposit” with automatic electronic transfer of Rs. 2,000 on the 5th of every month from his salary account for insurance payment.
Pro-tip: This will help make sure you don’t forget, so you don't have to pay possible late fees. This will also keep your money safe from yourself.
Riti had admitted her daughter Minal into an expensive private school and was able to pay the monthly fees thanks to careful budgeting. However, certain one-time demands- like a school trip to Ooty, a dress for the annual function and extra guitar lessons for Minal, put a lot of pressure on Riti‘s budget. She found it difficult to manage these expenses. To pay for these expenses, she was forced to use her credit card and also take a personal loan against her salary account.
How did she solve this problem?
She looked at the last two years to identify these irregular expenses, listed all of them and marked the months in which these expenses typically come. To this amount, she added a 10% increment for inflation and divided the total by 12- which was all her irregular and seasonal expenses for the year.
Riti incorporated this expense in her budget and started a savings account in Minal’s name and automatically put away a sum of money every month into this account. Of course, she had to create another source of income, which she did by taking online tuitions to earn a little extra money.
Pro-tip: With your limited income, you may find it difficult to fit in these additional expenses. As you save for them, look for ways to decrease other expenses and increase your income.
Shruti loved gifting her family and friends on Diwali but never thought of it as an ‘expense’ while budgeting. She would shop and pay for these expenses through her credit card, which added to her debt and reduced her savings.
How did she solve this problem?
Shruti first made a list of all the people she wanted to gift to and then decided to assign an average spend per person. She resolved to stick to this goal and decided to create a separate “Diwali fund” to save up for this goal. She also became wiser and started shopping a few months in advance during sales and offers and got great deals, which also helped her save money.
Pro-tip: Save for these expenses in advance so that you don’t feel guilty when you spend the money. Consider it “planned spending”.
Here's how you should account for your seasonal expenses:
- Start with listing down all your seasonal and irregular expenses over the year. If you can’t remember all your irregular expenses over the course of the year, write down all the months of the year and note down the expenses associated with each month.
- The total of this amount is your irregular/seasonal expense for the year. Add 10% to this amount before including it into your budget, as a buffer.
Pro Tip: Create a separate savings account just for the seasonal and irregular expenses so that you do not end up using the money in your emergency fund. You may not use this money for months on end, but it will be there when you need it.
Now that these arrangements are met, meeting seasonal and irregular expenses should be easier and should make your life stress-free. Remember to review your expenses every year and update the changes in your budget so that you are never taken by surprise by any expense.
Go here to know about budgeting pitfalls you must avoid.