This week, we’ll talk about periodic expenses, discussing what they are, how they can mess up your spending plan, and how to adjust your spending plan with these expenses in mind.
First thing, what are periodic expenses? Periodic expenses, also known as irregular, seasonal, or occasional expenses, are expenses that occur just a few times a year and are often overlooked when developing a spending plan. Some examples include personal property taxes, certain insurance plans with annual or semi-annual premium payments, gifts, birthday expenses, holiday expenses, school expenses, home furnishings, repairs, auto licenses and inspections, home warranty plans, and vacations and trips to name a few. These have a way of really throwing off your month-to-month spending plans if not adjusted for. Let’s say your monthly fixed and flexible spending is typically $3000 a month. However, in August you have about $400 in back to school expenses, as well as $200 for a birthday, and $600 for a home warranty annual premium. Then in December, you have $500 for holiday expenses, $100 for personal property taxes, $200 for another birthday, and another $400 for an annual insurance premium. All of a sudden you have two months that are measurably different than the rest, creating potential challenges towards having the funds to cover those two months.
So how do we adjust for this? One way is to create a reserve fund. To do this, we’ll total all of our periodic expenses for the year, divide by 12, and save that much each month. Going back to our previous example, we’ll add up the $400 for the back to school expenses, $400 for the two birthdays, $500 for the holiday expenses, $600 home warranty annual premium, $100 for personal property taxes, and the $400 for the annual insurance premium, totaling $2400. Divided by 12, we’ll save $200 a month, much more reasonable than coming up with $1200 in August or December. Keep in mind, this reserve fund savings should be separate from savings plans you’ve developed for other financial goals. You can also keep track of your reserve fund by creating a simple table, each month tracking how much you spent on periodic expenses, how much you saved for periodic expenses, and your balance.