Reader Kim sent me an email with an interesting question that I thought was worth addressing in a full post since it’s something that everyone has to deal with at some point: How do you pay for irregular expenses?
Let me start with a caveat: there are many ways to handle this issue, and I’m definitely not an expert. However, I have a few ideas, and I can share what works for me.
There is one thing you must do before any of my suggestions can work for you, and it’s this: You must live below your means.
And by that, I mean that you must spend less than you bring in each pay period. Because if you are spending more than your income, then there is simply no way you will be able to set aside money for those irregular expenses.
But let’s assume that, like Kim, you have a budget that’s pretty realistic. So, for example, each month you set aside $500 for groceries and household expenses, $1000 for daycare, $200 for utilities, etc. Then the question is: How do you prepare for irregular expenses?
Kim specifically mentioned expenses like kids’ sports and car repairs as her budget busters. Personally, I am usually able to absorb such expenses with my regular income – in other words, I pay for such expenses with money that would have gone into savings instead.
But I realize that I am in an unusual position, because we are able to save a substantial amount of money each month because we’ve paid off all of our non-mortgage debt. And, being an attorney, I make a pretty good salary that’s higher than most.
So what should you do if you don’t make enough each month to be able to pay an unexpected $300 car repair bill?
Let’s go back to that budget, and what I said about spending less than you bring in. Part of your monthly budget should be earmarked for savings. Hopefully you are saving for retirement, and maybe you even have enough to invest in a 529 or other investment account. But when I say savings in this context, I mean a taxable, liquid bank account that you make a regular deposit to each pay period. You can call the account a savings account or an emergency fund, the name doesn’t really matter. What matters is that you’re setting aside money each month for future expenses instead of spending every dime that you receive.
The amount you deposit each pay period will depend on how much wiggle room you have in your budget, and how much you tend to need on an irregular basis. Parents who have to pay for seasonal activities will have a greater need than someone who just needs money for car maintenance.
The basic idea here is that when it’s time to enroll Junior in baseball for $150 or the mechanic tells you it’s time to replace the brakes for $300, the money is there in the bank. Therefore, your budget is intact.
If you find that you never have enough in the bank, then you’re not living within your means. You need to cut back somewhere, whether it’s going to the movies less often, spending less on groceries, or reducing the amount you save for retirement. I’m not advocating that you cut back on retirement savings, but you have to make a choice about where your money goes. And that’s the “secret” to a balanced budget.