Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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I love Costco.
It’s true, there are few things that I cherish more than spending way more than I planned for to get high quality bulk items. It’s a problem, but I expect to spend a lot of money each month at Costco, so it works out.
The actual problem is not how much I spend at Costco each month. It’s that I always forgot that my yearly membership needs to be renewed every January. And that was not in the budget.
How Irregular Expenses Ruined My Budget
Before I learned how to budget, my finances were a mess. I knew I didn’t make a lot of money so I didn’t spend a lot of money, but I had no idea how much I was spending. I was slowly losing all of my savings, but I didn’t understand why.
Then I discovered the importance of tracking my spending.
I was on top of the world. I knew how much was coming in, how much was going out, and when all of my monthly expenses were totaled I was bringing in just enough to cover everything. Everything was going to be just fine.
Then Costco happened.
I had completely forgotten about my Costco membership renewal and since my budget was so tight I was now $50 in debt for the month of January.
$50 in debt isn’t so bad, I told myself, I can recover. The next month we had a yearly insurance premium. Then a AAA membership. Then a plane ticket. Pretty soon I realized that while my budget covered my regular expenses, it didn’t cover my irregular expenses.
I needed to adjust my budget.
How to Solve the Irregular Expenses Problem
There are two ways to handle irregular expenses.
1 Save a certain amount each month so you have enough to cover those expenses. This is the normal approach, and it is very effective.
Let’s say you have a couple of yearly memberships, a yearly insurance policy, quarterly taxes and Christmas shopping (because who likes to foot that bill at the end of the year?).
In all, you estimate that throughout the year this will cost about $1200 (just to keep the math simple). So you save $100 a month and BOOM you have the $1200 you need during the year. (That’s 12 months X $100 = $1200 for those keeping track at home).
This is especially helpful if you don’t make a lot of money because you get to break down large expenses into smaller chunks.
2 Build as much as your highest expense into your budget and save the rest. This is a lesser known approach, but it really helps increase your savings rate.
Let’s say that your yearly memberships are $200 each ($400 total), your insurance policy is $300, your taxes are $250 (I wish) and your Christmas shopping is also $250 (somehow less realistic than the tax bill).
Instead of saving $100 a month you would set aside $300 a month. For the one month that you have an extra $300 expense you have it covered. For the month when you have a $200 expense you get to save $100.
This method can help to increase your emergency fund, and it can help cover the unexpected expenses–like medical bills–when they come up. It’s a win-win.
Expect More Irregular Expenses
One key to this whole process is don’t save the bare minimum. There will always be more irregular expenses than you think. And I don’t mean medical bills.
For example, halfway through the year I decided to get life insurance. That’s an extra $150 a year.
If I only saved the bare minimum I would be $12.50 short each month because I didn’t save for the $150 expense. That means it is best to save more than you expect because there will always be more expenses than you thought.
What are some examples of irregular expenses you’ve had? How have you adjusted when your budget didn’t work out? Tell me about it in the comments below.
Common Irregular Expenses
- Insurance Premiums
- Taxes (paying them and/or paying your tax preparer)
- Oil Change (and other car maintenance)
- Servicing a fireplace (or pool, etc.)
- Christmas (or other holiday) shopping
- Expected travel to visit family
- Tuning a piano (or maintaining the quality of hobby items)
- Replacing Appliances
- Expected medical bills and co-pays (including dental work)
- Expected home repairs
- Car registration
- Purchasing contact lenses (if you wear them)
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Find a list of all the definitions used on this blog here.
Regular Expenses: Expenses that come out of your budget consistently every month. This includes expenses that don’t change like mortgage and car payment, as well as expenses that do change like your food bill and utilities.
Irregular Expenses: Expenses that come out of you budget every other month, semi annually, annually, or unexpectedly. This can include insurance payments, taxes, clothing, memberships, etc.
Savings Rate: How much money you are saving as a percentage of your income. So if you make $1,000 and you save $100 you have a 10% savings rate (1,000 / 100 = 10).